As a resident physician or new-to-practice physician, taking the leap into home ownership 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.
1. 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 will need 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.
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.
2. Homeowners insurance to protect your home and contents
Homeowners 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.
Is it right for you? If you want to save money and cover the financial risk of some losses on your own, basic insurance may be your best bet.
- 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.
Is it right for you? If you’re looking for a balance between coverage and cost, you may find it with a broad policy.
- 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.
Is it right for you? If you want peace of mind knowing your property and contents are protected from a wide range of catastrophic events, paying more for comprehensive coverage might be right for you.
3. 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.
Is it right for you? Talk to your MD Advisor* to figure out which solution is best for your situation.
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.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.