Purchasing a home is one of the most significant investments you'll make in your lifetime. But it’s not just about securing a mortgage and getting the keys. Protecting your new asset—and yourself—is equally important. Various types of insurance come into play when you buy a home, each serving a distinct role in safeguarding both your property and your financial well-being. Here’s an overview of the key insurance options every homeowner should consider when securing a mortgage.
1. Default Insurance (Mortgage Default Insurance)
When is it Required?Mortgage default insurance is mandatory if your down payment is less than 20% of the home’s purchase price.
Who Pays for It?The cost of this insurance, known as a premium, is added to your mortgage, meaning you’ll be paying for it over the term of the loan. However, the Provincial Sales Tax (PST) on the premium is due at closing.
PurposeThe primary purpose of default insurance is to protect the lender in case you default on your mortgage payments. This coverage allows you to secure a mortgage with a lower down payment—sometimes as low as 5%—by reducing the lender's risk.
While it may seem like an extra cost, default insurance can open doors to homeownership for buyers who may not have substantial upfront funds.
2. Creditor Insurance & Disability Protection
When is it Offered?Creditor insurance is typically offered when you sign your mortgage agreement, either through your lender or your mortgage broker.
Who Pays for It?You pay a monthly premium, which is often added to your mortgage payment. This premium may also be subject to provincial taxes.
PurposeCreditor insurance protects you by covering your mortgage payments or the remaining mortgage balance in case of death, serious illness, or disability. This can provide peace of mind for homeowners worried about their ability to keep up with mortgage payments under challenging circumstances, such as a sudden loss of income or life-changing health events. Essentially, it helps ensure your family won’t be burdened with the mortgage in times of crisis.
3. Home Insurance (Fire Insurance)
When is it Required?Home insurance is mandatory, and your lender will require proof of coverage before your mortgage can be funded.
Who Pays for It?You are responsible for securing and paying for this insurance through your preferred provider.
PurposeThis type of insurance safeguards your home from a wide range of risks, including fire, theft, vandalism, and natural disasters. Not only does it protect the structure of your home, but it also protects your personal belongings inside the property. For your lender, home insurance offers peace of mind, knowing their investment is secure. For you, it ensures that your home, and by extension your financial future, is protected from unforeseen events.
4. Life Insurance (Term, Whole, or Universal Life)
When is it Recommended?Unlike creditor insurance, life insurance is not tied directly to your mortgage, but it is highly recommended as part of a comprehensive financial plan. This is especially important for those looking to provide long-term security for their families.
Who Pays for It?You choose the type and level of coverage, and the premiums are based on those choices.
PurposeLife insurance is a financial safety net that protects your family in the event of your death. Unlike creditor insurance, which only covers the mortgage, life insurance can be tailored to cover a broader range of financial obligations, such as children’s education, living expenses, or other debts. It gives your family flexibility and financial security during a difficult time, ensuring they won’t struggle to keep up with mortgage payments or other essential costs.
Final Thoughts: Customizing Your Protection
Each type of insurance offers unique benefits that can be tailored to your specific needs and financial situation. When purchasing a home, it's essential to understand how each insurance option fits into your overall plan to protect both your investment and your family. Discuss these options with your mortgage broker or insurance advisor to ensure you’re making the best choices for your future. By securing the right coverage, you can enjoy your new home with confidence, knowing that you’re protected from life’s uncertainties.
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