Is mortgage loan insurance mandatory?

Although touted as the norm by many lenders and required by some, mortgage loan insurance is not mandatory. To cover the risks of death, disability and serious illness, it can be taken out with an establishment independent of the funding body and even be replaced in favor of another protection better suited to the needs of the borrower.

What is mortgage loan insurance?

Unlike CMHC mortgage loan insurance, which protects the lender against default by the borrower and is mandatory when the down payment is less than 20%, mortgage loan insurance aims to protect the borrower and the lender. It covers the mortgage balance when the borrower dies, supports mortgage payments in the event of disability, and pays a lump sum when a critical illness is diagnosed. Note that, regardless of the insurer, this type of contract can be canceled at any time and without penalty.

Take out insurance independent of the loan

Nothing obliges the borrower to purchase mortgage insurance or obliges them to purchase a contract with their lender. Because mortgage loan insurance is a contract independent of the loan, it is prudent to take out elsewhere than at your bank. Keeping the two contracts separate allows you to retain the benefits of your contract at the time of mortgage renewal, without a new questionnaire or medical examination. It is thus possible to change the lender to take advantage of a better rate even with a deteriorating state of health.

Insurability of contracts

Many policies offered by lenders only consider the full insurability of the borrower at the time of a claim, while independent insurers have questionnaires and medical examinations completed before the policy is taken out. However, it is not uncommon for the insurer to render a negative decision and refuse to pay the insurance profit in order to simply reimburse the beneficiary for the amount of the premiums paid by the borrower. In some cases of disability, these same insurances also limit mortgage payments to two years, as their definition of disability changes after two years as stated in their terms and conditions.

More flexible insurance policies

Unlike a mortgage loan insurance policy which pays off the loan balance, with an independent mortgage loan insurance contract, the borrower is free to name a beneficiary other than the lending financial institution. In particular, he has the possibility of designating his heirs who can decide to repay the loan or to use the insurance proceeds for higher priority needs.
Note that it is often possible to convert mortgage loan insurance taken out with a broker into regular life insurance without having to answer a new questionnaire.

There is a solution for each situation

As mortgage loan insurance offered by banks often does not differentiate between healthy and unhealthy people, this type of contract entails significant unjustified costs for a young and healthy person, who will find it more interesting to take out personal insurance.

Mortgage loan insurance is sometimes interest free, for example in the case of a single borrower without children. On the contrary, it may turn out to be too limited, because:

    it only covers the amount of the mortgage payment in the event of prolonged disability, often for a limited period of two years
    she only pays the mortgage balance in the event of death, which is insufficient in the case of, for example, a housewife with children.

Mortgage loan insurance is neither mandatory nor suitable for all situations. It is up to each borrower to analyze their needs and identify the coverages taken out through the employer. He can then determine which is the best protection for him among the various options available, including term or permanent life insurance, disability insurance or critical illness.