House Insurance Types Explained
Contrary to what some people think, home insurance and mortgage insurance are not the same thing! Read on to learn about each type of insurance and the difference between the two. When people think of home insurance and mortgage insurance, often they assume that they are the same, or at least very similar. In fact, they are completely different and address two different insurance needs. Let’s have a look at each one and explain the differences.
Mortgage insurance is insurance that covers the dollar amount of your mortgage, in case you default. If you were to die or become seriously ill and unable to pay your mortgage, mortgage insurance would pay off the remaining balance of your mortgage.
In Canada, every mortgage that is purchased with less than a 25% down payment is required to carry mortgage insurance. The majority of this insurance coverage is provided by a Crown corporation called Canada Mortgage and Housing Corporation, or CMHC.
In the past year, approximately 45% of all home buyers in Canada were required to buy mortgage insurance, a total of 1.6 billion dollars worth of insurance. Typically the cost of this insurance is rolled into your monthly mortgage payment so there are no added premiums to pay.
Mortgage insurance allows people with limited savings to buy a home earlier by guaranteeing the full amount of the mortgage. This way, the lenders essentially carry no additional risk that the home owner will default or the loan as a result of injury or death. Buying a home without mortgage insurance requires a much larger down payment which many people simply can’t afford or would have to save for several more years to acquire.
Mortgage insurance allows you to buy a home with a down payment of as little as 5%, which is a real advantage, particularly for first time home buyers, who may be just out of school or trying to get out of the rut of paying rent.
Home insurance, on the other hand is insurance that you buy to cover the replacement cost of your home should it be damaged by fire or other accidents. Home insurance also covers the replacement cost of your belongings should they be damaged or stolen.
There are several different types of home insurance.
Comprehensive Home Insurance. This type of insurance covers your home and its contents for all risks that are insurable. The exception would be certain natural disasters that are uninsurable.
Basic Insurance. This is also known as named perils insurance since it allows you to specify the types of hazards you want the insurance to cover. This is a cheaper option, but also results in lower levels of coverage. This type of coverage may be appropriate for a cottage or other vacation property.
Broad Insurance. This type of insurance is a combination of comprehensive and basic coverage. For example, you may have comprehensive coverage on the building itself and basic coverage on your belongings.
No Frills Coverage. This is a plan for properties that are otherwise uninsurable, usually due to a problem with the physical structure of the building. This might include a barn or other structure that doesn’t meet current building code requirements.
Life Insurance. Is a contract between an insured (insurance policy holder) and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the “benefits”) in exchange for a premium, upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. The policy holder typically pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also sometimes included in the benefits.
Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot, and civil commotion.
Life-based contracts tend to fall into two major categories:
- Protection policies – designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
- Investment policies – where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US) are whole life, universal life, and variable life policies.
Some Banks also offer mortgage life insurance coverage which will pay of the remaining amount of the mortgage upon death. These policies are usually not good value for money. Talk to an independent Mortgage Broker to compare policies
The bottom line
To sum it up, the purpose of home insurance is to protect the homeowner. Home insurance protects the homeowner against loss of use of the home or the personal belongings contained in the home. It is a separate premium that you pay to your insurance company. You choose the type of home insurance policy you want and the level of coverage that you’re comfortable with, and pay the appropriate premiums.
The purpose of mortgage insurance is to protect lenders. Mortgage insurance is required in Canada for properties that are purchased with down payment of less than 25% of the purchase price. The premiums are usually rolled into your weekly or monthly mortgage payments and the vast majority of this insurance is administered and guaranteed by the Canada Mortgage and Housing Corporation.