The 3 Types of Insurance with your mortgage
Mortgages require 3 types of insurance, each has its own purpose. Depending on your down payment amount you may need all three.
If you have a conventional mortgage you will not need the first type of insurance. If your down payment is less than 20% you will need to have mortgage insurance that protects the lender.
All mortgages will need the second type of insurance and it is highly recommended to have the 3rd type of insurance although it is not mandatory.
Let’s look at the 3 types of insurance:
1) The first is Default Insurance: CMHC, Genworth or Canada Guaranty
This is the costly one, as you are required to pay this if you put less than 20% down payment on the house.
Depending on how large a down payment you put down, the premium will be reduced by the size of the down payment. The premium is calculated and is added to the mortgage amount as a onetime fee which they include as part of the total mortgage.
This insurance only protects the lender in case you default and stop making payments on your mortgage. If this happens this insurance allows the lender to make a claim and get all the remaining money back.
2) The second insurance is the fire and contents insurance:
You are required to protect the property in case of fire. The lender will be in the first loss position. This means if there is ever a fire the lender is paid first.
This type of insurance is usually taken care of by a general insurance company. The best advice is to call the same company as your car insurance as you can get a multi-product discount and it normally runs about $300 to $500 per year.
You must have a binder letter from your insurance company for the signing at the lawyers office just before your possession date.
3) The third type is Life insurance:
Life insurance coverage is completely optional. I always recommend that you have a separate life insurance policy that covers the full mortgage balance in case of you or your spouse’s death. The house is completely paid off if either of you pass away. Any remaining funds are then paid to the surviving spouse or the estate. This can help with other expenses.
I always recommend getting a separate term life policy as it is the cheapest type of life insurance for most folks. You can get this type of policy from any life insurance planner.
I never recommend you take the lenders insurance, if you switch lenders at the renewal date, then the insurance collapses and you must re-qualify for a new policy. You are older and could have health issues that do not allow you to qualify.
A normal term life insurance policy will cover you for up to 20 years. Hopefully you will not need life insurance after that period.
If you buy a bigger house you can always add a term rider to the old policy to further protect you and your spouse.
Insurance is an important aspect of every mortgage. The second and third types can be shopped around competitively.
The first insurance has the same premium with all three companies. They all charge the same premium rate. Each company has a few special products for different types of mortgages. You bank or mortgage broker can place your mortgage with the one that best suits your needs.
Lenders normally make the choice for you but you are allowed to ask for a specific one if you want.