April 2007

Inoculating your Mortgage against Illness?

Most homeowners will agree that their biggest debt is their mortgage loan. As well, it has been shown that, more and more, this debt is particularly vulnerable when illness is concerned. Caution!

Whenever someone enters into a mortgage agreement, he/she is immediately informed of the importance of protecting this loan “against the worst case scenario”, that is, the homeowner’s death. For years, perhaps because it was the norm, life insurance was considered as an automatic – and satisfactory – addition to any mortgage loan. However, society is changing quickly and several experts deem that nowadays a mortgage is just as vulnerable to the owner’s illness as it is to his death.

If death comes later, the risk of illness is greater
Because of better life conditions and advancement in the medical fields, people living in Western countries have a much longer life expectancy than did their parents. Paradoxically, the longer they live, the longer they risk contracting a serious illness and the greater the risk of endangering their ability to see to their financial obligations – especially the biggest one, paying their mortgage.

A major risk
Studies have shown that, each year, nearly 25% of repossessed homes are the result of borrowers who default on their mortgage payments because of illness. The problem is that, although we are more susceptible with age, illness does not affect only those happy souls who have finished paying their mortgage. For example, according to Statistics Canada, approximately one third of all stroke victims are under the age of 65.

Preventing the unthinkable
As such, an increasing number of home buyers are seeking to protect their loan, not only with life insurance, but also with disability and critical illness insurance. While life insurance leaves the heirs with a debt-free property, disability insurance ensures a level of income that is sufficient to repay the debt should the owner become disabled.

However, the option that is now being sought most often by people who take out a mortgage loan is critical illness insurance. In fact, the advantages of this type of insurance are especially appealing when associated with a mortgage loan. First, it provides greater peace of mind regarding the loan: the borrower is assured that, if he is diagnosed with a critical illness (in general, policies cover 10 to 25 of the most common critical illnesses), the mortgage will be repaid in full and the debt will be eliminated. As well, if needed, this type of insurance also provides a certain degree of flexibility: a borrower can choose between insuring fixed capital or insuring “decreasing” capital that accounts for the fact that the mortgage balance decreases as payments are made. As such, you can look forward to premiums that are lower than with a policy that covers a fixed sum.

Looking Forward
This explains why an ever-increasing number of people regard critical illness insurance, added to life insurance and/or disability insurance, as an invaluable tool to offset mortgage-related risks.
In fact, some people without children or dependents are looking at this type of insurance first to provide them with financial manoeuvring room and freedom of action for the future in the event they should become ill.

In a sense, this new type of insurance is part of the general trend of North Americans wanting to protect their living conditions and work around the financial risks related to their health.

This is, in a manner of speaking, inoculation for mortgages!