Welcome to the first part of the home-buying process—the part where you Google “how to buy a house” because for some reason they don’t teach you this kind of stuff in school. 

This is an exciting time in your life, and we want to make sure that when you’re going through this process for the first time, you don’t get overwhelmed with on-the-stop offers for this insurance product or that finance deal. In this guide, we’ll walk you through insurance products we think will set you up for success when making one of the biggest purchases of your lifetime! 

Step 1 – Get mortgage pre-approval

Before you even start dream clicking through realtor.com, you should go to your bank or a mortgage broker to get pre-approval. This pre-approval process will take your credit score, liabilities (your debt), your income, your job security, and other factors to tell you how much a lender will approve you for when you go through with applying for a mortgage. They’ll give you a budget to work with when you start looking—this way, you don’t put an offer on your dream house and then later find out you can’t afford the mortgage on it and lose it.

Step 2 – Get shopping!

This is the fun part! It’s where you find a real estate agent and start going to open houses. Your real estate agent will help you through the process of finding a house, making an offer, and choosing conditions, so we won’t get into the nitty-gritty of that here. But one thing to make sure to add to your conditions list on your offer deal is a home inspection. Trust us, you’ll thank us later.

Step 3 – How does a mortgage work?

After your offer on the house is accepted and the conditions of the offer (such as a passing home inspection or completion of outstanding renovations), if any, are met, the deal is sent off to the bank/lender to approve your mortgage. A mortgage is a financial contract between you and the lender (usually a bank). It’s an agreement that they will lend you the money (minus the down payment) to pay the house and you will pay them back over a set amount of time.

The lender may have specific terms they need to be met in order to lend you the money to buy this house. It may mean a certain amount of money for a down payment, mortgage insurance, mortgage default insurance, title insurance, or proof of home insurance. Sometimes these are deal-breaking requirements and sometimes these are just product pushes that you may not actually need.

Let’s cover the basics of what your lender may require or ask for, so when they ask you, you don’t have to panic buy your way into insurance you may or may not need.

What is mortgage insurance?

This is the cross-sell that your mortgage banker is being incentivized to unleash on an unsuspecting home buyer. In the event that you pass away, mortgage insurance will pay off the remainder of the loan. That sounds like a prudent objective. What could be wrong? Well, for starters the amount of mortgage insurance coverage decreases as you pay off the loan, and the payout can only be used towards the loan—nothing else. The premium you pay for this insurance does not decrease as the coverage amount decreases. This insurance can be expensive. Additionally, if you port the loan because you found a better deal, the insurance will be cancelled. The lender may make mortgage insurance seem like it’s a requirement, but it is not.

Do you need it: No. You can choose better options for financial protection (see step 4).

What is mortgage default insurance or CMHC insurance?

While mortgage insurance isn’t mandatory, mortgage default insurance may be, depending on your circumstances. In Canada, if your downpayment is less than 20% of the purchase price of the house and the house is worth less than $1 million dollars, you NEED mortgage default insurance. This insurance will make your mortgage payments when you cannot (not only due to death but for other reasons as well). It’s the lender’s reassurance that if you can’t make the payments, the insurance will. This coverage helps many first-time homebuyers (and others choosing a smaller downpayment) get a mortgage, because the insurance makes the bank feel confident the mortgage payments will get made one way or another. Mortgage default insurance is offered by providers such as the Canada Mortgage and Housing Corporation (CMHC), a crown corporation, or private mortgage insurers like Genworth Financial Canada and Canada Guaranty.

To learn more about how mortgage default insurance works and how much it costs when your downpayment is less than 20 percent, head to our CMHC Mortgage Default Insurance Calculator.

Do you need it: Maybe—if your down payment is less than 20% of the purchase price. 

What is title insurance?

When you buy a house, a transfer of title takes place. A title is proof that you own the property. Title insurance protects you from any financial loss you may take on as a result of title errors and the legal cost to get them fixed. Coverage may include errors in the documents, pre-existing liens (the previous owners didn’t settle their mortgage), fraud (someone steals your identity and sells your house without you knowing), encroachments in your space (your neighbour built a deck on your land) among other clerical issues that may be expensive to sort out.  

Do you need it: Not mandatory. But it’s prudent to have it in place, especially if you don’t have a backup fund to any cover the legal expenses required (which can creep up into the hundreds or thousands) to get title issues straightened out. 

What is home insurance?

Home insurance is coverage for the actual house itself—the walls, roof, fence, garage, etc. Lenders need this insurance because it tells them “if the house burnt down, the insurance will pay off the mortgage.” You also want it to make sure that in the event of a tragedy like a fire, you won’t have to keep paying a mortgage on a house that doesn’t exist. Home insurance also includes liability insurance, meaning that if you get sued or cause damage to someone else’s property, they’ll likely cover the cost. It also may include bonuses like identity theft coverage depending on the provider. 

Do you need it: Yes, if you will have a mortgage. If you’re paying cash, it’s up to you, but bear in mind if something happens to the house it’s on you to repair or completely replace. 

Step 4 – Protect your asset

Congratulations! You’ve made it to the final step! You got all your paperwork in order before the closing date, the boxes are packed, the truck is rented and you’re all ready to move in! The process of purchasing a home and moving can be a lot of stress—but worthwhile to finally get your own piece of property. 

So, now that you have this beautiful home for you and your family to flourish—and a mortgage—let’s talk about your financial future. 

Your family may depend on you to pay for their cost of living including food, electricity, and mortgage or car payments either in part or in full. But you have to ask yourself: 

What would happen to my family if I passed away or got sick and could not support them? Well, if you had mortgage or mortgage default insurance, that may be your expensive and mostly inadequate solution. But what about the cost of living, funeral expenses, cost to retrofit your home for new disabilities, additional medical care… the list goes on. We can recommend a few insurance policies that can give you the peace of mind that the big mortgage you took out to buy your new house WON’T bankrupt your family.

What is life insurance?

Life insurance is an agreement between you and a life insurance company, where if you die, they will pay a death benefit: a lump sum of tax-free money to someone you choose. In exchange, you agree to periodically pay them an insurance premium: a small amount of money over time. This money can be spent how your beneficiary wishes and can be a better alternative to mortgage insurance as the coverage amount does not depreciate over time. With life insurance, your premiums are guaranteed for the entire coverage period, you can port your loan to any bank and your coverage continues, you can also designate the beneficiary you want rather than have all the money go to the bank. 

When is the best time to buy life insurance?

Right now! The younger and healthier you are, the less life insurance will cost. However, there are still great affordable options available for everyone. 

Read more about how life insurance works. 

What is disability insurance?

Disability insurance, sometimes also referred to as income protection insurance, is a product that offers you protection against loss of income by replacing a substantial portion of your paycheque if you become disabled. If you are a homeowner, disability insurance can help cover your monthly mortgage outstanding or other monthly expenses, should you become disabled, because of an illness or an accident. As compared to your lender’s coverage your own individual disability insurance will generally be cheaper, more customizable, and provide better coverage definitions. Your individually owned disability coverage has several advantages versus any disability coverage you may have at work.

Read more about how disability insurance works.

What is critical illness insurance?

Critical illness insurance is an agreement with a life insurance company that they will pay you a tax-free lump sum if you develop a life-threatening illness, health event, or undergo treatment while under their coverage. In the event of a diagnosis of a life-threatening illness, your individual critical illness cover can ensure a financial cushion for you to pay off your outstanding mortgage principal, use it for your treatment, or to meet other lifestyle needs. Your personally-owned critical illness insurance policy has more comprehensive coverage for illnesses, guaranteed premiums that stay constant over the chosen term, and the flexibility to port the loan. 

Read more about how critical illness insurance works.

Now that you know a few insurance products that may help secure your financial future after purchasing a house, we’d love to help find out which insurance policies would be best for you! Whether your first house is a tiny fixer-upper or a million-dollar condo in the sky, reach out to one of our advisors to chat about which options and policies are best for you.

In most of our articles, when we mention term life insurance, we are referring to level term life insurance. What this means is the premium rate is locked in for the length of your coverage term. For example, let’s say you applied and were approved for a 20-year term life insurance policy, with a monthly premium of $30. That $30 is what you pay every month for 20 years (or 240 months). 

Some applicants shop and compare for quotes to ensure they can lock in the lowest monthly premium for the longest term possible given their age, health, and smoking status. This ensures a stable fixed cost and the peace-of-mind knowing they are covered for their desired length of time: Typically, 10, 20, 30 years or to age 65 or 100, depending on their provider.

However, there is another term insurance which is not mentioned quite as much, that works a little differently and offers insurance seekers added flexibility and options with their coverage. Annual renewable term life insurance, while not the most popular or well-known product, has some features that set it apart from level term insurance and make it a useful option for specific financial situations.

What is Annual Renewable Term life insurance?

Annual Renewable Term (ART) life insurance is a short term life insurance policy which locks in your premiums for one year and can be optionally renewed at the end of each year. 

The insurance company guarantees to renew the policy yearly for a set number of years. 

The premium rate is guaranteed but not level: it increases every year. While, yes, the price increases, you are still guaranteed your insurability every year you renew your term. The premium rates start low at the beginning of the policy but increases every year as the age increases, given the rise in mortality risk of the insured person.

Annual renewable term life insurance caters to individuals seeking temporary life insurance coverage at a low cost.

Learn more about renewing life insurance.

How does Annual Renewable Term life insurance work?

Just like any other form of life insurance, the annual renewable term life insurance offers financial protection to your dependents, in the event of your passing away, during the term of the policy.

To obtain ART, you have to first establish your insurability with a medical questionnaire or further medical underwriting through a medical exam and/or blood work.

Once your insurability is established, you choose your death benefit amount and find out what your monthly (or yearly if you choose) premium is. You now have life insurance for the year, and can renew each year until you feel you no longer need the coverage or want to look into other options such as term, whole, or universal life insurance.

The first year’s premiums are typically much lower than what one would pay in a longer term life insurance policy, but keep in mind they do increase every year. While the increase may appear minimal in the early years of the coverage, they will change substantially once you hit higher ages.

Also keep in mind that in most cases annual renewable term life insurance is not a long-term solution (more on this below). If you continue to renew your coverage beyond the initial first few years, you may quickly approach the point where a 10 or 20 year term life insurance policy would have a lower premium than what you currently pay. Unfortunately, you’ll have no time machine to go back and choose the least-expensive option at this point.

How much does Annual Renewable Term life insurance cost?

Below are the annual premiums a healthy, non-smoker at age 40 would qualify for with both ART coverage and 10-year term life insurance for $100,000. In this case, the applicant would save hundreds of dollars over the 10 year period by locking in a rate for pure term life insurance; there are no cost savings here through ART coverage.

Premiums for $100,000 Coverage, Non-Smoker, Good Health, 10-Year Term, Age 40-49

This example for the same circumstances at age 50 are a little different. While there is slight savings in the early years with ART, the annual renewable premiums are substantially higher in the later years. After 10 years, one who chose term life insurance would save about $800 (male: $833, female: $793).

Premiums for $100,000 Coverage, Non-Smoker, Good Health, 10-Year Term, Age 50-59

The savings are even more pronounced in one’s sixties. Below are the premiums for the same $100,000 policy for a 60-year-old non-smoker. A male applicant could save over $3,300, and a female applicant would save over $2,500, at the end of the term as opposed to continually renewing their Annual Renewable Term coverage.

Premiums for $100,000 Coverage, Non-Smoker, Good Health, 10-Year Term, Age 60-69

Why would someone choose Annual Renewable Term life insurance?

There are several situations where an annual renewable term life insurance policy makes sense. 

Short term debt obligations: Those carrying a temporary debt can find annual renewable term policies useful. If you are carrying a mortgage debt or car loan, but know you will be selling that asset to pay off the debt in the near future, an annual renewable policy can be a cost effective way to protect yourself in this period.

For those that rely solely on workplace benefits for their life insurance coverage needs, ART policies can offer a temporary solution when one is between jobs or find themselves temporarily unemployed.

Another ideal use case for ART coverage is for those who need insurance immediately, but intend to improve their health to the point where it would lower their premium for another form of insurance.

Some other uses for ART coverage include:

• Business owners looking to cover a short-term loan
• New parents making sure they are covered while they weigh all of their insurance options.
• Smokers who can take the time afforded to them through ART coverage to quit smoking permanently and dramatically lower their future insurance premiums.

What are the differences between ART and term life insurance?

Despite both being temporary forms of life insurance, annual renewable term life insurance does have some key differences with traditional term life insurance.

How do you buy annual renewable term life insurance?

Not all Canadian life insurance providers offer ART policies. Companies like Empire Life have options for annual renewable term life insurance with the additional option to convert that coverage to a 20-year term life insurance policy, should you decide that is the right option for you down the road.

Regardless of whether you choose a term life policy or think an annual renewable term is what your coverage needs call for, our licensed brokers have decades of experience helping Canadian insurance seekers find the right coverage at the right price for their unique coverage needs.