Life, Disability and Critical Insurance Considerations
One of the many benefits of having a large team structure such as ours is that we are able to have a dedicated insurance specialist on our team. As many of you likely already know, Steve Lockner is our in-house insurance specialist. If you have any questions about what is discussed in the following piece about life and disability insurance, or any insurance questions in general, please reach our to Steve, or any other team member.
Buying property is one of the biggest investments people make, and it comes with its share of responsibilities, the biggest of which, typically, is having to pay off your mortgage every month. But if anything should happen to you, would you be able to continue making your payments? That’s the main advantage of life, disability and critical illness insurance. They help protect you and your loved ones so you can avoid any headaches should something unexpected occur. Here’s how these policies work.
Why do you need to protect your mortgage loan or home equity line of credit?
Amortization or repayment periods for mortgage loans can extend over 30 years in Canada, so there’s a strong chance that you’ll be paying off your debt for a long time. But no one is safe from the unexpected. In the event of an accident, illness or death, a related insurance policy on your loan protects your ability to pay off your mortgage in the same way other kinds of insurance protect the value of your assets (movable assets, car, boat, etc.) from damages. If you are unable to work due to health issues, disability insurance would allow you to continue paying off your mortgage and cover other day to day expenses and grant you peace of mind.
What types of insurance can you consider to cover mortgage or home equity line of credit obligations?
There are three distinct types of protections available:
- Life insurance.
- Disability insurance.
- Critical illness insurance.
The difference between mortgage life insurance and a stand alone life insurance policy.
In the event of death, a mortgage life insurance policy would pay a lump sum directly to your bank instead of giving the money to a named beneficiary, usually a family member. That said, the coverage through a bank insurance policy is always declining as your mortgage is being paid down, but your monthly costs are staying the same. Other considerations with a mortgage life insurance policy is that you may have to change lenders, which would require you to have to find new coverage that could be more costly or may not be available to you for various reasons.
The JMRDW Team always suggests getting your own stand alone life insurance policy that isn’t part of your mortgage. The value of the death benefit stays the same no matter how much of the mortgage you have paid down, and the bank is not the beneficiary. You can name anybody as beneficiary, most likely a spouse who also owns the home, providing more flexibility in determining what to do with the proceeds in the event of death. Some of the proceeds could be used for paying down the mortgage, but also for living expenses to help manage the burden of losing an income-earning spouse.
The cost of insurance, or premium, depends on the amount of your insurance policy, your age, and your habits (like whether you smoke or not). When you are younger, insurance is cheaper. We find younger clients will often take out larger policies vs. the exact value of their home to make sure there is extra funds left over or to cover future larger debt obligations.
If you are in the process of buying a house with a mortgage, or currently own a home with a mortgage and are unsure of your insurance coverage, please reach out to the JMRDW Team with any questions that you have.
How do disability and critical illness insurance work?
Disability insurance
Rather than paying you a lump sum, disability insurance compensates for your loss of income while you’re unable to work due to an accident or illness.
If you don’t have adequate coverage, you may need to tap into your savings to afford your daily expenses, the biggest of which is usually a mortgage payment, while you recover.
Critical illness insurance
Critical illness insurance offers a lump-sum payment. This money can be used towards your mortgage to ensure you can continue paying it off.
The important thing to remember is that on top of all their everyday financial responsibilities – mortgage, groceries, child-related expenses – people with an illness may also have additional medical expenses. For example, someone with cancer may have to travel outside of their hometown to receive treatment, which would incur transportation, lodging and food costs for their loved ones. Also, some prescription medication may not be covered by provincial public drug benefit programs. So you’re better of protecting yourself to avoid a large bill.
What is covered under disability and critical illness insurance?
It’s important to understand what’s considered a disability and what’s considered a critical illness.
A disability is anything that prevents someone from earning an income. This includes common physical disabilities like an injury, whether it’s the result of a workplace accident or not, as well as psychological issues, such as burnouts, anxiety, and depression – so it’s not just physical injuries.
Critical illnesses include severe medical conditions such as heart attacks, strokes and cancer. The important thing to remember for this kind of coverage is that it has to be a life-threatening illness. For example, stage 1 breast cancer won’t be covered because it’s too early. However, if it continued to develop and became life-threatening, you would then be able to open a claim.
Other types of illnesses, such as degenerative diseases, may also be covered. It’s very important to take the time to read all the details.
For these two protection policies, the cost of the monthly premium also depends on your age and your loan amount.
Again, please do not hesitate to reach out to Steve or any member of the team with questions in regards any of these insurance policies or if you are interested in a policy.