Your Canadian Guide to Insurance Types
Table of contents
With so many types of insurance available in Canada, knowing what you need and how much coverage you should select can be challenging. As a homeowner, you will want to ensure your property is adequately insured, but other forms of protection can safeguard you or your family.
Insurance is essential for safeguarding against unforeseen losses. Understanding the basics of home insurance and other types of coverage available can help protect you and your family from the unexpected.
Key Takeaways
- Canadians can access various insurance options, each protecting and covering specific risks.
- Insurance can act as a financial safety net and provide peace of mind.
- Individual insurance needs will vary; however, some types are mandatory.
What Is Insurance?
Insurance is a financial safety net to protect individuals and families from unexpected losses. In exchange for a regular insurance premium, an insurance provider offers compensation or coverage for specific types of risk. The premium the insurer charges transfers the specific loss risk from you to the insurer.
These risks include illness, accidents, property damage, or even death. Whether you want to safeguard your home, health, mortgage and other credit balances or income, insurance provides peace of mind by absorbing the financial impact of life’s uncertainties.
In Canada, insurance plays a vital role in personal financial planning. With many insurance options available, you may require several policies depending on your life stage and coverage needs.
Do I Need Insurance?
Most Canadians will need some form of protection in their lifetime, but insurance needs vary from person to person. Whether it’s legally required, like auto liability coverage for your car or mortgage default insurance when you purchase your home with less than 20% down payment, or simply a wise financial decision, such as life, critical illness or disability coverage, insurance transfers the risk of unforeseen life event to the insurer for a monthly premium.
Insurance should play an essential role in your financial planning if you own a home, drive a vehicle, travel, or have dependents. Even if you’re young and healthy, having the right insurance can protect your income, assets, and loved ones while giving you greater peace of mind. Ultimately, insurance ensures you’re not facing it alone or at full cost when the unexpected happens.
What Insurance Types Are Available in Canada?
A wide range of insurance products are available to protect you, your family, and your assets. Each type of insurance covers specific risks, with some essential and legally required and others offering optional protection based on your lifestyle, goals, or life stage. Here’s a breakdown of the most common types of insurance available that you may want to consider.
Mortgage Loan Insurance
Mortgage loan insurance or mortgage default insurance protects the lender if you default on your mortgage. It is mandatory if you put less than 20% down payment when purchasing a home. This type of insurance is available through the Crown Corporation Canada Mortgage and Housing Corporation (CMHC), Canada’s main provider of mortgage loan insurance. Private insurers Canada Guaranty and Sagen also offer this type of insurance.
The cost of mortgage loan insurance varies based on your down payment, type of loan, property value, and whether you pay the amount up front or add it to your mortgage payments. Premiums are calculated based on your loan-to-value (LTV) ratio and amortization if you’re a first-time homebuyer (FTHB) or purchasing a newly built home.
Mortgage Protection Insurance
Mortgage protection insurance is a type of insurance offered when you take out a mortgage, but you can apply for coverage at any time during the life of your mortgage. This insurance is not to be confused with mortgage loan insurance, which protects the lender. Mortgage protection insurance is tied to your mortgage and covers the borrower with optional coverage, including life, critical illness, disability, or job loss protection.
Depending on the coverage you opt for, this insurance can help you make mortgage payments or pay off the remaining balance owing on your mortgage if you become unemployed, injured, disabled, critically ill, or die. The policies, benefits, and limitations will vary between providers, including the age limits for when the policies are terminated.
Title Insurance
Title insurance provides financial protection and coverage against potential risks and issues associated with a property’s title. Title insurance on standard mortgage registration may be optional in most provinces but is strongly recommended to help protect homebuyers and existing homeowners. This insurance protects you against past events that could impact the property’s title.
Title insurance companies assume the risks associated with a property’s title and provide coverage for those risks as outlined in their policy. The premiums are a one-time cost and can be purchased when closing on a property or after you’ve become a homeowner. Having title insurance will financially protect you as a property owner and lender in case of damages or losses due to liens, errors, title defects, or fraud.
Homeowner’s Insurance
Homeowner’s insurance is essential for protecting one of your most valuable assets: your home. This type of insurance typically covers the structure of your house, personal belongings, and liability if someone is injured on your property. Most policies protect against risks like fire, theft, vandalism, personal injury and specific weather-related damage. However, some policies exclude coverage for floods, earthquakes, or sewer backups and may require add-ons or separate policies.
While not legally required, mortgage lenders usually mandate home insurance as a condition of financing to protect their collateral, making it a must-have for homeowners.
Tailored policies like tenant or condo insurance offer similar protections for renters and owners. Tenant insurance covers personal belongings and liability, while condo insurance extends coverage to improvements within your unit and complements the condo corporation’s building insurance.
Life Insurance
Life insurance provides a financial cushion for your loved ones in the event of your death. This type of insurance can cover expenses like funeral costs, debt repayments, mortgage obligations, and ongoing living costs. Life insurance options include term and permanent.
Term life insurance provides temporary coverage for a fixed period, such as 5, 10, or 25 years. If the policyholder passes during the term, the beneficiaries receive a payout equal to the amount of coverage the policyholder chose, which is tax-free. You may be able to convert term life insurance to a permanent life insurance policy.
Permanent or whole life insurance provides lifelong coverage as long as premiums are paid. When the policyholder passes, the beneficiaries receive a tax-free payout based on the coverage the policyholder chose. This insurance policy accrues a cash value over time that can be accessed through a cash withdrawal or a loan. However, the amount becomes taxable if cash is accessed through the policy.
Auto Insurance
Auto insurance is mandatory for all drivers in Canada. This insurance provides financial protection in case of accident, theft or damage involving your vehicle. While the minimum required coverage varies by province or territory, all policies include third-party liability insurance.
In addition to the mandatory auto insurance coverage, you can opt for additional protections like collision coverage, comprehensive coverage, and GAP insurance. Collision coverage covers damage to your vehicle after an accident. Comprehensive insurance covers non-collision-related events like vandalism, fire, or weather-related damages. Guaranteed Asset Protection (GAP) insurance covers the difference between what you owe on your lease or loan and the actual cash value (ACV) if your vehicle is deemed a total loss and your maximum insurance payout falls short of the total amount you owe.
Travel Insurance
Travel insurance protects Canadians travelling from unexpected expenses or disruptions. Some policies are all-inclusive, with the premium covering everything from medical emergencies, trip cancellations or interruptions, lost or delayed baggage, and flight delays. Other policies allow you to select the coverage you require, so you only pay a premium for the coverage you need most.
Without travel insurance, any sudden illness or injury in another country that requires medical attention could result in thousands of dollars in out-of-pocket expenses. You could also lose thousands of dollars if your trip needs to be cancelled or cut short.
Health Insurance
Health insurance can help cover costs not included in your provincial health plan. While Canada’s universal healthcare system covers many essential medical services, it doesn’t include everything. Health insurance can cover prescription drugs, dental and vision care, physiotherapy, and more. This type of coverage is typically provided through workplace benefits, but individual plans are available for self-employed individuals or those not covered by their employer.
Frequently Asked Questions
What types of insurance are mandatory in Canada?
In Canada, the most common type of mandatory insurance is auto insurance, which is required in every province and territory for anyone who owns or operates a vehicle. In Québec, basic health insurance coverage is also mandatory through the public Régie de l’assurance maladie du Québec (RAMQ) if you do not have access to a private plan. Mortgage loan insurance is mandatory only if your down payment is less than 20% of the home’s purchase price.
What is the difference between term and whole life insurance in Canada?
Term life insurance provides coverage for a set number of years and pays out a death benefit if you pass away within that term. On the other hand, whole life insurance offers permanent coverage up to a certain age set out in your policy and includes a cash value component that grows over time.
Do I need travel insurance if I have provincial health coverage?
Having travel insurance when leaving your home province or travelling abroad is a good idea, even though it’s optional. Provincial health plans provide limited or no coverage for out-of-province or out-of-country emergency medical expenses, ambulance costs, or repatriation. Without it, you could face significant out-of-pocket costs.
Is life insurance better than creditor protection if you have a mortgage?
Life insurance provides a predetermined lump sum to your beneficiary, whereas creditor protection only pays the remaining mortgage balance off with your mortgage lender. If your mortgage balance is mostly paid off, it would be of little benefit to your beneficiary.
However, life insurance coverage makes more sense if you plan to pass on your assets, including your home, to your beneficiary. Your beneficiary can pay off the remaining mortgage balance, keep the remaining amount, and live in a mortgage-free home.
Final Thoughts
Knowing your insurance options is crucial for safeguarding your financial well-being and protecting your loved ones, family and assets. From mandatory policies to optional coverage, each type of insurance available to Canadians can help mitigate your risk and provide peace of mind. Whether you’re a homeowner, renter, or planning for the future, having the right insurance policies in place can make a difference in managing life’s unexpected events.
Ready to explore your mortgage and insurance options further? Our nesto mortgage experts can provide personalized guidance for mortgage creditor protection and connect you to an insurance expert to help you find the most suitable solutions for your needs.
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