Buying a home is a major responsibility. While there are many benefits of home ownership, such as having a place you can truly call your own, building equity and investing in your future, you're also usually signing up for as many as 30 years of payments.
This might not seem like cause for concern. After all, you went into the property-buying process understanding the commitment you're making. And you see yourself living in your home for at least that long—possibly longer. You carefully chose this house for its proximity to excellent schools and beautiful parks, or perhaps because it's only a quick commute to work.
However, you never know what is going to happen in life. Which is why you protect important assets, like your home, with insurance. While you likely had to purchase homeowners insurance before taking the keys to your new nest, you may also have been confronted with another choice: buying life insurance or mortgage protection insurance in Ontario.
While either protects your home, and family, in case you die, there are a few differences between the two that Ontario homeowners should be aware of. In this blog, the experts at Morison Insurance will guide you through those key differences, so you can make an informed decision about which type of insurance is best for you.
Also called MPI and mortgage life insurance, this policy ensures your family can make monthly mortgage payments if you—the policy holder or borrower—die before the mortgage is completely paid off. Depending on the policy, there may also be protection offered for a limited period of time if you lose your job or become disabled after an accident.
An individually owned life insurance policy provides tax-free money to your family when you die. This money is paid out in a lump sum by your insurance provider and is known as a death benefit. Life insurance can also be paid out after a certain length of time, when a missing person is legally considered deceased.
There are a few key similarities and differences between mortgage insurance and life insurance. For the most part, an MPI policy works like a traditional life policy. You pay your lender a monthly premium that keeps your coverage current and ensures you're protected. In the event you die during the policy's term, the policy provider pays out a benefit that covers your mortgage payments. While most companies pay out the full mortgage, some only offer a limited set of payments—which is why it’s important to understand exactly what is outlined in your policy agreement.
However, this is essentially where the similarities end. There are many differences between a life insurance policy and mortgage insurance, which we've outlined below.
One of the most important distinctions between mortgage insurance and life insurance is who the beneficiary actually is. With a typical term life insurance plan, usually your family receives a lump sum of cash that they're able to distribute according to how they see fit—usually to cover bills and mortgage payments.
However, with mortgage insurance your family doesn't see the money. It goes directly to the lender, who takes care of making mortgage payments on your family's behalf. The benefit of mortgage insurance payment is that while your family has less autonomy over the money, they don’t have to worry about making mortgage payments. A drawback of mortgage insurance is that the money can only be used to pay off the mortgage, rather than covering other bills and expenses like funeral costs.
Usually, life policy rates are dependent on factors like your health and occupation. This is not the case for MPI policies, as they have guaranteed acceptance. This can be majorly beneficial if you have serious health concerns or work at a high-risk job. However, guaranteed acceptance usually means that the average MPI premium is higher than a life insurance policy premium. This might not be as worthwhile to you, if you're a healthy adult at a low-risk job.
The final difference between a traditional life insurance policy and an MPI policy are the rules and limitations regarding the benefits' balance. A life policy typically holds the same balance throughout the entire term. However, most mortgage insurance policies have a few strings attached. Many of these policies include a clause that states your death benefit's balance follows your mortgage's balance. This means that the longer you make mortgage payments, the lower your outstanding balance is. Thus, the less valuable your MPI policy also becomes. The theory being that you'll need less money to pay off the outstanding mortgage balance as you pay more and more of it off over the years.
There is another limitation to MPI policies that homeowners should be aware of. Often, you only have a certain amount of time before you can purchase an MPI policy after buying your home. Some companies require you purchase the policy 24 hours after closing the sale, whereas others will give you up to five years.
Unlike auto insurance, you’re not legally required to purchase mortgage protection insurance in Ontario. While your mortgage lender may recommend a policy, it's your choice whether you decide to buy.
If you purchase a mortgage protection insurance policy, you'll make monthly payments for the duration of the policy term. If you stop making these payments, your insurance company will cancel your benefits. This is just like any other insurance policy. You're also able to cancel a MPI policy at any time—however, if you do, you won't be refunded any of the money you've already paid towards the policy.
If you think a mortgage insurance policy sounds right for you and your family, there are a couple of different ways you can purchase the policy:
When choosing your mortgage, your lender may offer a mortgage insurance policy. If your lender doesn't offer MPI policies, it's also possible to ask your realtor or your lender's representative to refer a company that offers mortgage insurance.
Often, companies that offer life insurance also offer mortgage protection insurance in Ontario. Sometimes, you're able to bundle an MPI policy with other types of insurance—possibly decreasing your premiums.
As we touched on earlier, most insurance providers have a limit on how long you have to buy an MPI policy. If this sounds like something you're interested in, it's important to purchase the policy as soon as possible after closing your home's sale. While different companies offer different periods of time when you can purchase an MPI policy, you may not be able to purchase an MPI policy at all if you miss that window. If that ship has sailed and you no longer qualify for MPI, it's worthwhile to consider a term life insurance policy instead.
Although these two policies sound alike, private mortgage insurance and mortgage protection insurance are not the same. Private mortgage insurance, or PMI, protects the owners of your mortgage in the event you stop making payments. The important distinction here is that you don't benefit from private mortgage insurance. It's designed to protect the lender, not the borrower—unlike mortgage insurance.
The cost of an MPI policy varies, like any other insurance policy, according to the lender's rates. However, there are also a few other factors that dictate how much the policy will cost:
Sometimes, other big life changes can occur that may make it difficult for you to continue making timely mortgage payments. That's why it's important to be as prepared as possible—to offer your family protection, and to ensure you're able to continue living in your home. The following outlines a couple of additional mortgage insurance products.
If you're diagnosed with a critical illness, this policy pays out the outstanding balance on your mortgage, whether you can work or not. While conditions vary, usually Ontario residents between 18 and 55 can apply for critical illness mortgage insurance. Often, seniors will be denied this kind of coverage based on age. Should a covered critical illness occur while you have this policy, it covers your mortgage payments and frees up that money for other health-related uses. For instance, it could be used for private nursing care, physical therapy, medical care, home modifications and child care services.
This policy helps make specific debt payments on your behalf in the event you suddenly lose your job. Job loss insurance can help make mortgage payments, personal loan payments and credit card payments for a limited period of time. The policy may also have limits on how much monthly debt will be covered while you're unemployed.
This policy covers your ongoing mortgage payments for a specific period of time in the event you become disabled due to illness or injury. Mortgage disability insurance kicks in when said illness or injury prevents you from working normally. The policy generally takes about 60 days to begin, and it lasts as long as you're unable to work or until a designated maximum time period is reached. This time period will be outlined in your policy, but usually it's around 24 months. Sometimes, mortgage disability insurance is sold as part of a bundle, which includes mortgage protection insurance, job loss insurance and/or critical illness insurance.
Whether you opt for mortgage protection insurance or a standard life insurance policy is a big decision. Not only do you want to feel like you've adequately explored all your options, but that you're making the right choice that provides the best coverage for your needs.
What’s also a big decision is choosing the right home insurance. If you’ve just moved into a new home and haven’t taken this important step, call one of our dedicated Morison Insurance brokers today. We can help you find a home insurance policy that’s right for you. Our brokers are highly knowledgeable about a wide range of home insurance products and are able to offer you expert advice without pressuring you to make a decision either way. We'll also shop around on your behalf to find the absolute best policy for you.
To learn more today, or to inquire about a quote, we invite you to give us a call at 1-800-463-8074. You can also reach us online for more information.
This content is written by our Morison Insurance team. All information posted is merely for educational and informational purposes. It is not intended as a substitute for professional advice. Should you decide to act upon any information in this article, you do so at your own risk. While the information on this website has been verified to the best of our abilities, we cannot guarantee that there are no mistakes or errors.
