What are the different types of insurance homeowners may need?
Overview of the 3 types of insurance for homeowners:
- mortgage loan insurance, which protects the lender
- homeowner’s insurance, which protects your home and its contents
- creditor insurance or term life insurance, to protect you and your family if you can’t make your mortgage payment
As a resident physician or new-to-practice physician, taking the leap into homeownership is rewarding after years of hard work. But with so many decisions to make in such a short time, choosing the right type of insurance to protect your new property — and your mortgage — can feel overwhelming.
Here are three types of insurance you’ll want to consider before you make your house a home.
- Mortgage default insurance when you buy a home
Many people take out a mortgage — essentially a loan — when they purchase a home. If your down payment on a house is less than 20% of the total purchase price, you are required to get mortgage default insurance (also called mortgage loan insurance) from Canada Mortgage and Housing Corporation or Sagen. It is available only for homes purchased for less than $1 million. This type of insurance safeguards your lender against the risk of you defaulting — it protects the bank, not you.
<1>Is it right for you? If you don’t have the required 20% for a mortgage down payment, you’ll need mortgage default insurance to access the real estate market. This costs anywhere between 2.8% and 4.0% of your mortgage amount. If you have room on your line of credit, you could take the amount you need to get to your 20% down payment and avoid paying the mortgage default insurance.
- Homeowner’s insurance to protect your home and its contents
Homeowner’s insurance protects your home and its contents from chance events that are unexpected or accidental (also known as “perils”). This could include theft, loss, and fire or water damage to the inside or outside of your home.
Choosing the right type of coverage depends on your desired level of protection — and your budget.
It’s a bit like buying a car. Just want to get from A to B? A basic, no-frills commuter car might be your best option. Want a little more comfort? Adding a few options to a mid-range vehicle might fit the bill. Looking for a luxury ride? All the bells and whistles will get you there in comfort, but you’ll pay for it.
Let’s take a closer look:
- Basic insurance: This type of policy provides a minimal level of coverage for your home, covering only stated perils like fire, wind, theft, and vandalism. But don’t count on basic insurance to cover anything beyond the perils named in your policy.
- Broad insurance: This policy type offers the same coverage for your home as basic insurance, but also includes coverage for loss and damage to your belongings due to other events — like storm damage, for example. If it’s not listed in your policy, it may not be covered. You’ll also pay more for this type of coverage, although opting for a higher deductible can reduce your premiums.
- Comprehensive: The highest coverage available to homeowners protects your home from all disasters, except the exclusions named in your policy. These could include damage caused by flooding or by wear and tear on your home.
- Creditor insurance or term life insurance
Taking out a mortgage represents a long-term obligation to pay back the money you’ve borrowed. But what if something happens down the road and you can’t make your payments?
- Creditor insurance (also called mortgage protection insurance) is designed to pay off your mortgage and relieve the financial burden on your family in the event of your death, disability or critical illness. Your premiums will stay the same over the life of your mortgage (even though your potential payout shrinks).
- Term life insurance provides a level amount of insurance coverage for a specific period (e.g., five, 10 or 20 years). If you pass away during the period of coverage, your beneficiary gets the proceeds tax-free, and some of this money can be used to pay off your mortgage.
The bottom line
Buying a house or condo will possibly be the largest purchase you’ll make. Be sure to protect the place you call home by understanding your options for the three types of insurance.