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Did you know that 48% of bankruptcies and mortgage foreclosures are due to disabilities? How can you cope financially if you suffered a long-term disability?
With mortgage disability insurance, you ensure that you can make your monthly mortgage payments if you can’t work due to an injury or illness. But is it the best insurance coverage for you?
In this post, we explore:
- What mortgage disability insurance is, and how it works
- How much mortgage disability insurance costs
- Why you should get a long-term disability insurance policy instead
Keep reading to find out if mortgage disability insurance is right for you.
What Is Mortgage Disability Insurance?
Mortgage disability insurance is a type of mortgage insurance that protects your home if you can’t perform the regular duties of your occupation because of an injury or illness. If you become disabled, the insurance company pays your monthly mortgage payments to your mortgage lender after a 60-day waiting period.
If you get your mortgage loan through one of the big banks, the representative will offer this to you for financial protection. After all, you just made the biggest purchase of your life, so you want to make sure you can make the mortgage payments even if you can’t work.
Can you get disability insurance on your mortgage?
One of the benefits of mortgage disability insurance is that it is effortless to get. All you need to do is answer a couple of health questions, and you’re approved on the spot. The financial institution adds the premiums for the insurance coverage to your monthly mortgage payments, so you don’t even have to worry about a separate bill.
While some mortgage lenders will let you buy mortgage disability insurance as standalone coverage, others require you to add it to mortgage life insurance. Both of these are a type of creditor insurance that makes sure the bank’s investment is protected.
Who can get mortgage protection insurance?
To be eligible for mortgage disability insurance, you must be a Canadian resident between the ages of 18-65. You must also actively work at least 25 hours per week and be the borrower, co-borrower, or guarantor for the mortgage loan.
What happens if you replace or obtain a new mortgage?
Your coverage ends unless you replace it with a new mortgage loan with the same lender without changing the outstanding principal amount. That means if you buy a new home and get it financed by another lender, you will have to reapply for coverage all over again.
What happens if you refinance your mortgage?
It depends on the amount. With some lenders, if the amount that you add to the mortgage is $100,000 or less, you can reapply without answering health questions.
What are the drawbacks of mortgage disability insurance?
While the idea behind mortgage disability insurance is good, some limitations to the insurance coverage severely hamper the product.
First of all, it only covers you for up to 24 months. After that, the insurance company stops making your mortgage payments, and you’re left on your own. While that might be fine for a short-term disability, what happens if you’re permanently disabled?
Secondly, the maximum monthly benefit amount is capped at $3,000-$3,500 per month. If your regular mortgage payments are higher than that, you’ll have to pay the difference. With ever-increasing home prices resulting in larger loans, you might not find that limit high enough.
Lastly, if you become disabled, making mortgage payments is just one of your concerns. You also have to worry about other essential expenses like groceries and utilities that mortgage disability insurance doesn’t cover.
As you can see later on, a long-term disability insurance policy addresses the shortcomings of mortgage insurance with other value-added benefits.
What are the exclusions?
Mortgage protection insurance doesn’t cover every type of disability. Here are some of the more common exclusions you’ll find:
- Pre-existing conditions, meaning you received treatment, took medication or consulted a healthcare provider in the 12 months before applying and become disabled within 24 months after applying.
- Medical conditions due to alcohol or drug abuse.
- Disabilities resulting from cosmetic surgery.
- Partial disabilities, meaning you can still perform the regular duties of your occupation part of the time.
How Much Does Mortgage Disability Insurance Cost?
The insurance premium that you pay is based on your age and your monthly mortgage payments, including the principal and interest portion. For example, if you are 40, your monthly premium rate is $2.15 per $100 of mortgage payment. If your regular mortgage payments are $2,000/month, your monthly premium will be $2,000 / $100 * $2.15 = $43.
The mortgage lender has the right to increase the insurance premium at any time.
Here are the premium rates for other age brackets:
Age | Mortgage disability insurance rate per $100 |
|---|---|
Under 30 | $1.35 |
30 to 35 | $1.70 |
36 to 40 | $2.15 |
41 to 45 | $2.80 |
46 to 50 | $3.45 |
51 to 55 | $4.45 |
56 to 60 | $5.50 |
61 to 64 | $6.00 |
Is mortgage disability insurance worth it?
If you already have a long-term disability insurance (LTD) policy, you don’t need mortgage disability insurance. That’s because the former is much more comprehensive, replacing a significant percentage of your income instead of only covering your mortgage payments.
However, if you don’t have any other disability coverage, it’s a good idea to get the mortgage insurance first. When you buy an individual disability insurance policy, you can always cancel the mortgage protection insurance later.
Mortgage disability insurance vs. long-term disability insurance
While mortgage disability insurance only covers the mortgage, individual long-term disability insurance does much more. That’s because you can get a much higher maximum monthly benefit with LTD insurance, allowing you to pay for other living expenses besides the mortgage. You can use the tax-free benefit to pay for groceries, utilities, personal care items, property tax, phone bills, and much more.
Basically, you can use the tax-free benefit however you want, while the benefit from mortgage insurance has to be used to pay the regular mortgage payments.
Here is a table showing the differences between the two types of disability insurance:
Mortgage disability insurance | Long-term disability insurance | |
|---|---|---|
The monthly benefit is paid to | The mortgage lender | You |
Choice of how to use the benefit | No, you must use it for regular mortgage payments | Yes, you can use it however you want |
Benefit period | 24 months | Age 65 |
Maximum monthly benefit | $3,500 | 60-80% of your income |
Easy to qualify | ||
Guaranteed premium | ||
Benefits for partial disabilities | ||
After mortgage is repaid | Coverage ends | Coverage continues |
Coverage tied to lender | ||
Premium reimbursed after waiting period is fulfilled | ||
Tax-free | ||
Exclusions | More | Fewer |
Cost | Less | More |
Where Can You Buy Mortgage Disability Insurance?
Although it may be more convenient to buy it through your mortgage lender, you can get better coverage from an insurance agent. Most of the insurance coverage you get from the big banks like BMO, RBC, and CIBC suffer from the drawbacks listed above, like a short payment period or a low maximum benefit.
The mortgage disability coverage you can get from an insurance agent has these advantages:
- Coverage starts from the first day for hospitalizations and surgeries, so you don’t have to wait 60 days.
- If you’re still working past age 65, you can extend the coverage to age 75.
- You can get benefits for partial disabilities, which you can’t with mortgage disability insurance.
- You get a higher maximum monthly benefit amount of up to $5,000 instead of $3,000.
- You can receive benefits for up to age 65 instead of only 24 months.
- Coverage is not tied to the mortgage, so you can keep it even if you change lenders.
- Coverage is not restricted to your mortgage, so you can cover other personal loans like a line of credit or car loan. It can even cover your rent if you’re a tenant.
- The insurance company pays you instead of the mortgage lender, so you have more flexibility to use the benefits.
Desjardins and iA are some of the disability insurance companies that offer these better mortgage insurance products.
Do you need to answer health questions or undergo a medical exam?
Yes, you have to answer a few health questions to qualify for mortgage insurance coverage. Depending on your answers to these questions, you may have to undergo a medical exam. The medical, which is paid for by the financial institution, includes blood and urine tests.
On top of that, the insurance company can request a medical report from your doctor for more details on your medical history.
Should you get disability insurance on your mortgage?
Mortgage disability insurance should always be a second priority to your personal LTD insurance. If you don’t qualify for personal disability coverage for some reason, you can fall back on mortgage protection insurance from the bank.
As mentioned previously, one of the benefits of creditor insurance is that it is easy to get coverage. That’s because it is part of a group insurance policy. Underwriting isn’t as strict with a group policy, and the insurance application is much shorter.
Besides disability insurance, what other types of mortgage insurance are there?
Mortgage protection insurance isn’t restricted to protecting you in case of a disability. Other types of creditor insurance like mortgage life insurance, critical illness insurance, job loss insurance, and mortgage loan insurance are described below.
Mortgage life insurance
Unlike mortgage disability insurance, mortgage life insurance coverage offers financial protection in case you die prematurely. If you die, the insurance company pays a death benefit to your mortgage lender to pay off the outstanding balance. Drawbacks of mortgage life insurance include a low maximum limit and decreasing coverage as you pay down the mortgage balance.
Mortgage critical illness insurance
With critical illness insurance, if you have cancer, heart attack, or stroke, the insurance company pays a lump sum benefit to the lender to apply to the outstanding mortgage balance.
Similar to mortgage disability insurance, there is a maximum benefit that you can get under mortgage life insurance and critical illness insurance. So read the fine print to make sure you have enough insurance coverage to pay off the outstanding mortgage balance.
Job loss insurance
This provides monthly mortgage payments up to six months to your mortgage lender in case of involuntary loss of employment. It should help relieve your financial stress while you search for a new job.
Mortgage loan insurance
While the first three are optional mortgage insurance products, mortgage loan insurance is mandatory if the down payment on your home is less than 20%. This type of insurance protects your lender in case you default on your mortgage payments. These insurance plans offer no protection in case of death, disability, critical illness, or job loss.
Need A Mortgage Disability Insurance Quote? Contact Us Today
Are you worried about paying your mortgage if you become disabled?
If so, mortgage disability insurance coverage may be for you. However, a personal long-term disability insurance policy might be a better fit.
As independent insurance brokers, we can help you find the best disability insurance policy to fit your needs. By taking a holistic view of your financial situation, we can customize an insurance plan that takes care of the mortgage and all your living expenses.
Contact us today at 604-928-1628 or info@briansoinsurance.com to see how you can protect yourself and your family today!
Get Your Disability Insurance Quote Now!
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
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