Buying a home is most likely the largest purchase you will ever make. It is essential to protect your purchase with the appropriate insurance coverage - both for the property itself and your income as the homeowner.
You may think of property insurance as the coverage that is acquired in case of damage to the building and its contents.
Many factors are taken into consideration when a homeowner applies for home insurance, such as:
· Type of residence (i.e., single- or multiple-family, rental property, condominium, or recreational property)
· Exterior material (i.e., wood, brick, or cement)
· Interior finishes
· Age of structure
· Square footage
· Heating type
· Type of electrical system
· Septic and Plumbing system
· Roofing condition
· Fire and safety protection (i.e., km from fire hydrant and fire hall)
· Home features (i.e., hot tub, sauna, swimming pool)
A comprehensive policy covers a building and contents for insured perils. Perils include events such as fire and theft. Optional coverage is available that will cover perils not automatically included in the policy, such as earthquake coverage or sewer backup and flooding.
The building coverage insures the structure. Damage is typically reparable but serious damage or destruction of the home may require rebuilding. The amount of insurance for rebuilding is for construction costs, which does not include the cost of land on which the home sits. Rebuilding costs vary widely so the insurance should be based on a cost-per-square-foot basis; example: in Southern Ontario $200 per square foot is a general rule of thumb.
Personal belongings (“contents”) are insured to a specified limit. Some policies restrict coverage on valuable items, such as art, jewellery, or sports equipment. Additional coverage may be required if the value of these items exceeds policy limits. Keeping a current home inventory makes it easier to file a claim if contents are lost or damaged; a claim may be more readily substantiated when photos of contents accompany the inventory.
Condo owners are insured by their condominium corporation for damages to common property or common elements, such as the lobby, elevators and parking garage. The condo owner needs insurance against events that may occur in their unit and damage another unit. This can include fire or water damage from leaky pipes. Insurance is also needed to cover personal upgrades to a unit, such as hardwood floors or high-end appliances, and against special assessments that are incurred when the condo corporation insurance or reserves are insufficient to pay claims or expenses.
Mortgages are issued based on the financial capability of the homebuyers, which is usually a combination of down payment and income. Income enables the regular mortgage payments to be made. But, there may not be enough money to make mortgage payments if income is lost due to the premature death of one of the homeowners. That is where life insurance comes in and can replace lost income. Life insurance on the lives of the owner(s) can ensure the surviving family retains the home if such a tragic event occurs.
An individually owned insurance policy is controlled by the person who “owns” the policy. The policy owner can choose:
· the amount of life insurance coverage
· the form of the policy (either term or permanent insurance)
· additional terms to customize the policy
· the beneficiary
· coverage of one life or two lives
Term life insurance is often used for mortgage coverage because its premiums are lower than premiums for an equivalent amount of permanent insurance. Term life insurance is available for specific periods of time, one year, five years, ten years, etc. and can be structured as a level death benefit or to decrease over the term. A renewable policy is guaranteed to renew at the end of their term, even if health of the insured as deteriorated. A convertible policy owners has the option of converting from term to permanent at the time of renewal. Additional terms (riders) unique to the policy owner can be added to both term and permanent policies to increase coverage or extend coverage to other family members.
The insurance death benefit is the amount paid when the life insured dies. It should be in an amount equal to the outstanding mortgage, at a minimum. Although the mortgage may reduce over time to be more than the life insurance coverage, many homeowners now have a home equity line of credit (HELOC). The death benefit above that needed for the mortgage can be used to repay the HELOC or other debts that may exist.
Mortgage insurance is offered by financial institutions that provide mortgages to home owners; it is a type of life insurance. It is not to be confused with mortgage loan insurance, which is required by lenders when a home down payment is less than 20% of its purchase price.
Mortgage life insurance covers the lives of the mortgage holders in the amount of mortgage outstanding. Therefore, as the value of the mortgage decreases, the insurance also decreases. When the mortgage is paid off, the coverage ends. Coverage will also usually end if the mortgage is switched to another institution, the mortgage increases, or the maximum age for coverage is attained. The policy can be cancelled at any time by written notice. The premium cost is added to mortgage payments. Premiums are typically higher than for personal life insurance because there is very limited underwriting of individual health risks. Therefore, a person who is in poor health and who qualifies for mortgage insurance may be well served by that option instead of personal insurance. In the case of mortgage life insurance, the beneficiary of the policy is the financial institution providing the mortgage.
For more information on insurance for your property, visit the Insurance Bureau of Canada.