Understanding Insurance Basics

Insurance for your Debts

If you have a mortgage, line of credit or other loan with a financial institution, you may also be offered insurance to make payments on that debt in the event that you are unable to, due to illness, accident or death.

These types of insurance are also known as creditor insurance because benefits are paid to the company that you owe money to. In most cases, the insurance product is linked to one specific debt, such as a mortgage, line of credit or a loan.

The most common categories offered are:

Life insurance on the debt

The insurance company pays the outstanding balance on the debt to which the insurance applies in the event of your death.

For mortgages and other loans for fixed-amounts, the death benefit (the outstanding loan or mortgage balance) decreases as you make payments and the outstanding balance is reduced.

Premiums are based on the original amount of the debt. As you pay down your debt, the premiums generally remain the same even though you will owe less on your loan or mortgage over time.

The financial institution that is owed the debt is the beneficiary of any creditor life insurance policy. The death benefit is paid to the financial institution, and not to your family or heir(s).

You would need to buy a separate life insurance policy if you want your family or heir(s) to receive a death benefit in the event of your death.

Critical illness insurance on the debt

In most cases, the insurance pays the outstanding balance if you are diagnosed with one of the critical illnesses specified in the policy or Certificate of Insurance.

Each policy or Certificate of Insurance lists which illnesses are covered and the requirements to qualify. For example, cancer is usually one of the illnesses covered, but some policies may limit coverage to certain types of cancer.

Pre-existing conditions are usually not covered, but some policies will pay benefits if you have been free of the illness for a period of time, defined in the terms and conditions.
Premiums are based on the amount of the debt.

Disability insurance on the debt

Disability insurance generally makes the minimum required payments on the debt, for a specified time, while you are disabled. It generally does not pay off the full outstanding balance.

You will still be responsible for paying the balance when you recover or after the coverage period ends.

Each policy will define the disabilities that would make you eligible for benefits and other terms and conditions, including the amount of the payments and how long they would last.

Credit card balance insurance

Credit card balance insurance is usually a combination of several insurance products, including critical illness, disability, job loss and life insurance.

If you become injured, disabled or lose your job, the insurance will make the minimum payments on your credit card, or will pay a specified percentage (usually 3-5%) of the outstanding monthly balance.

If you die or have a critical illness, the insurance company will pay off the credit card balance owing at the time of your illness or death. There is usually a maximum period of time for which benefits will be paid.

The premium is charged directly to your credit card every month and is subject to applicable provincial or territorial taxes. You will also be charged your credit card's interest rate if you do not pay the balance in full.

The premium will change each month depending on the balance you owe: the lower the balance, the lower the premium.

Credit balance insurance is optional and is not a condition for obtaining a credit card.

Things to consider before you sign up for insurance on your debts:

• Review your existing insurance coverage—for example, you may already have insurance coverage through your employer that will help pay off your debts in case of death or a disability.
  
  
• Compare the coverage offered with other options, such as a term life policy, to see which option meets your needs and offers the best value.
  
  
• Be aware that creditor insurance often has exclusions relating to pre-existing conditions, such as asthma, high blood pressure or heart disease. Read your policy carefully and make sure you understand what is covered.