The article “Who’ll Pay For The Cottage If I Die?” was originally published on MoneySense on October 16, 2019.
Having a mortgage doesn’t necessarily mean you need life insurance coverage equal to the amount you owe on it.
Q. We are non-residents who recently purchased property in Ontario for $550,000. We will be using this as a vacation home and want to know whether it would be a wise idea to buy term insurance to cover the mortgage in the event of death—or is there any other low-cost insurance product we can purchase? The aim for the coverage to pay off the mortgage if anything happened to either of us.
A. Before purchasing any insurance product, it is important to assess why you are buying it. Anyone who owns a home should have home insurance that protects against personal liability, the home contents and the dwelling itself. As far as life insurance for real estate, there are a few different considerations.
One common solution is to opt into mortgage insurance when you secure your mortgage. Generally, mortgage life insurance will pay off the balance of your mortgage in the event you die—this is the life insurance component—as well as make your mortgage payments if you are disabled and cannot work. This latter component is a form of disability insurance. It is important to read and understand the terms of your mortgage insurance, or any insurance policy, so you’re clear on exactly what is covered.
However, despite the availability of mortgage insurance, most people would be better off with separate life and disability insurance. Mortgage insurance tends to be expensive relative to the cost of securing the same level of coverage independently, and the terms of a separate insurance policy may also be more favourable.
In your case, Di, the fact that you are non-residents may or may not matter. That is not to say you should not purchase insurance, but your non-residency should not be the primary decision impacting an insurance purchase, nor the fact there is a mortgage.
I do not believe that people should buy insurance simply because they have a debt. For example, a single homeowner with a mortgage and no dependents may not need life insurance at all, because if they died, the house would likely be sold, and the mortgage paid off by the beneficiaries of their will. But they may need disability insurance. Disability insurance replaces your income if you are unable to work, but still alive. Life insurance may not be as important a consideration for a single person, while disability insurance is very important for anyone who is working and not financially independent.
Di, if you have dependents—whether a spouse, or dependent children, or other family members—you should consider life insurance. The life insurance coverage you choose may be more or less than the amount of your mortgage: It should be based on how much money your dependents would need to maintain their standard of living and be OK financially if you died. Would the Ontario home be sold if you died? Or could they comfortably maintain the mortgage payments? If this is an income property, for example, the death of the owner would not necessarily stop the tenants’ ongoing rent payments from being used to pay the mortgage.
Remember to consider the tax payable in the event of your death. As a non-resident, you may have Canadian capital gains tax payable on the property in the event you die. You may or may not have tax payable in your country of residence, depending on that country’s taxation of foreign income or of capital gains.
A life insurance needs analysis can help assess a family’s coverage requirements. You should consider this potential insurance holistically: I think you need to look at all your assets and all your liabilities, Di. You need to look at your dependents’ expenses in the event you died, and their future income-earning ability. There may be a life insurance need.
And as for your disability insurance needs, the options in Canada and abroad all seek to replace a percentage or monthly dollar amount of your income. You may not be able to secure insurance in Canada if you are a non-resident, as many insurance companies will not provide Canadian insurance policies to non-residents. You may be able to obtain mortgage insurance as part of the bank financing, even now after you have already taken ownership Inquire with the lender if this option interests you.
Still, you may find you can obtain better and cheaper coverage in your country of residence. It may not literally be attached to the mortgage or even in Canadian dollars, but that is OK. Again, I would be inclined to consider your life and disability insurance needs overall, and not necessarily base them on the fact that you have a mortgage.
As a non-resident owning real estate in Canada, you should consider a Canadian will, as it may be preferable to a foreign will. As your property is in Ontario, you may also want to consider an Ontario power of attorney for property that would appoint someone to make decisions about the home if you were sick, injured or disabled.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.