Insurance options for your home

Term policies provide greater flexibility.

Deanne Gage 17 June, 2013 | 6:00PM

A recent BMO study found that half of Canadians plan to buy (or trade up) a home in the next five years. While lining up financing for your new property is top of mind, don't neglect reviewing your insurance options.

The first order of business is how to insure your mortgage in case you die before it's paid off. You could either get mortgage insurance through your bank or financial institution, or buy a term life-insurance policy.

People who opt for mortgage insurance do so because it's the only option they've heard about, says Jared Webb, a life agent with Victoria-based Fernhill Financial and a member of Advocis, the Financial Advisors Association of Canada. "They're at their financial institution and are often led to believe they need to have this insurance to continue with their mortgage financing," he says.

Mortgage insurance works like this: You make set payments every month that are included as part of your mortgage. Should you die before the mortgage is paid off, your insurance should pay the remaining balance. Your beneficiary would never see the money; it would go directly to the lender.

The product is not without its wrinkles, Webb notes. For one, the death benefit declines as the mortgage declines. Yet you continue paying the same amount until the mortgage is gone. Let's say you are insuring a $200,000 mortgage. You die 10 years later and your mortgage is down to $50,000. The mortgage insurance would pay just the $50,000 even though you've been paying for $200,000 worth of coverage.

Compare this scenario to buying a 20-year, $200,000 term-insurance policy. As with mortgage insurance, you would pay a set amount of premiums. But unlike mortgage insurance, you'd have a guaranteed $200,000 worth of coverage for 20 years regardless of what the mortgage is, says Webb.

Another difference is that your heirs -- not the financial institution --would directly receive the money and it would be tax-free. That means they could spend the money how they see fit. Perhaps they'd pay off the mortgage or maybe they'd choose to keep the mortgage payments and pay off other debt and expenses instead. "It gives them more options and flexibility with decision-making at a time that tends to be very high in emotional stress," Webb says.

Underwriting is another factor when deciding between mortgage and term insurance. Mortgage insurance is underwritten at the time of claim. That means the financial institution won't take a really good look at your application until after you died. If for whatever reason, the insurers don't like the health assessment, the insurers can "just deny your claim and not forgive the mortgage. It doesn't happen all the time but it does happen," Webb says.

With term-insurance policies, underwriting is completed when you apply for the product. You have a medical, fill out a lengthy questionnaire and the premiums you pay are based on that. Once approved, your policy is guaranteed to pay your heirs.

There's also the issue of cost. In many cases it's cheaper to get a term policy than the mortgage insurance. So for the same premiums, you likely will be able to get more term insurance for your buck. That's a huge selling factor since that policy amount will not decrease, says Webb.

Once you've purchased your home, you'll need to investigate home-insurance policies. A policy will value not only the physical property you own but also the contents inside the home such as furniture, computers, paintings and jewellery, says Ian Morris, partner with Jones Deslauriers Insurance Management Inc.

Morris adds that many people are surprised the value of the insurance policy is not the same as the home's purchase price. "They are not linked together at all," he says.

Your insurance policy is all about what it costs to rebuild the home since you already own the land. For example, if you paid $1 million for a house in Toronto, it may cost only $500,000 to rebuild the property, Morris says. "Outside of bigger cities, it's usually the other way around," he notes. "It may cost more to rebuild the house than what they bought the house for."

To qualify for home insurance, you may need to upgrade certain things in your newly acquired home, or ensure they are taken care of before you take possession. Some insurance no-nos include knob-and-tube wiring and lack of handrails on staircases.

Water damage is the most common home-insurance claim, Morris says, but that doesn't mean it will automatically be covered. "You have a responsibility to mitigate your loss and perform upkeep," he says. If your basement is flooded because you didn't maintain your foundation or regularly clean out your eavestroughs, you're probably out of luck. But if your sewer backed up, that's likely to be insured if you selected it as part of your policy coverage, Morris explains.

If you've bought a home and plan an addition, Morris says you'll need builder's risk insurance, which will insure that part of your property against damages and construction mishaps.

Finally, Morris says title insurance protects you against errors on the property like liens or title fraud. It's typically sold to you by your real- estate lawyer and is a one-time payment when you buy the house.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.