Can Insurance Help Me With My Debts?
As a Licensed Insolvency Trustee office, we have the privilege of guiding people through their financial challenges and helping them find the best path forward.
During a no-cost initial meeting, we often hear the question: “Won’t my insurance cover that?” And it’s a fair question to ask. With so many types of insurance available—and Canadians among the most heavily insured in the world—it’s worth taking a closer look at whether insurance can help with debt.
Credit Card Insurance
Credit card debt is the most common type of debt that we see, and card companies offer an insurance product: balance protection. It is supposed to help if you are unable to pay your minimum payments for covered reasons like an illness or job loss. Does this insurance product help? Here are some questions to ponder:
- Will you be able to afford the monthly premium payment in addition to your other bills?
- If you only have a small balance or pay off your card every month, do you need the coverage?
- Does the insurance pay out the full credit card balance or just the monthly minimum?
- Will any of your other insurance policies provide enough to cover your credit card payments?
Our advice? Peace of mind in case of the unexpected is a good idea. Just balance that value with the cost of the product. And before buying, check the reviews of your credit card insurance product.
Mortgage Insurance
Lenders offer insurance on your mortgage. If you don’t opt for coverage, you may be required to show adequate life insurance coverage from another provider. For such a large financial milestone, mortgage insurance is a prudent step to take. Be clear if the insurance payout would be fixed at the initial mortgage amount or if it declines as the mortgage is paid off. You will likely have the same insurance premium to pay, but it could be buying you less and less insurance each year.
What About CMHC Insurance?
Some folks think they have insurance coverage from the Canada Mortgage and Housing Corporation (CMHC). Sadly, this is often a misunderstanding. The insurance coverage purchased here is for the benefit of the lender. If you do not meet your mortgage requirements and go into foreclosure, CMHC will pay the lender for any balance not recovered from the sale of the property.
Eventually, CMHC will then turn to the former homeowner and try to recover that shortfall. This can occur many years later and be an unwelcome surprise.
The requirement to have CMHC insurance is a factor of the size of the down payment on the original purchase.
Life Insurance
The choice to buy insurance is often a function of what stage of life you are in.
For example, when you have a young family and a mortgage, what would happen if someone in the household passed away? Would the family be able to pay the mortgage or have the property go into foreclosure?
We would highly recommend that both adults have sufficient life insurance to pay off the mortgage in full. That way, the household can continue to operate without any financial stress.
There are two different types of life insurance to choose from:
- Term life: Term life insurance has a premium payment that buys a set amount of life insurance if you pass away. The premium generally increases in cost as you age. Overall, it is usually the least expensive type of life insurance, and it is useful in paying off debts such as mortgages, credit cards, or tax debts.
- Whole life: Whole life insurance contains an added savings component. You pay a premium that covers the cost of the insurance and also pays into an investment account. Once the savings grow, the investment income can pay the premiums. We do not think that whole life insurance is a good idea for most, as it takes a large amount of savings to generate enough investment income. However, if it appeals to you, talk to your insurance broker. Note that whole life insurance tends to have a higher premium than term life.
Job Loss Insurance
Losing a job is one of the most frequent causes of insolvency. Thankfully, there are insurance options that may help.
- Disability insurance/critical illness insurance: Disability insurance pays a monthly amount if you are hurt or otherwise disabled. It often replaces your usual monthly income, so it is a very helpful tool for paying down debt and avoiding Bankruptcy.
Many people are fortunate enough to have disability insurance at their place of work and don’t even have to think about it.
There are two different types of disability insurance. Short term, which provides payment for a relatively short period of time (think 6 months or less), and long term, which runs for years, often kicking in after short-term relief options.
We strongly recommend disability insurance if you have loved ones who rely on your income. When you are young, this is usually very inexpensive.
- Worksafe or WCB: Employers are required to carry Workers Compensation coverage for employee injuries at work. So document everything! We have seen generous payouts, but also some folks denied coverage.
- Employment Insurance: If you work as an employee and get laid off or can’t work, it is possible to qualify for Employment Insurance (EI). It’s a federal government program that acts as a short-term bridge until you can find another job. You pay premiums into the EI program directly from your paycheque.
Conclusion
Yes, insurance can help you both with your debts and ongoing living expenses. Choosing the correct type of insurance and amount can be tricky, so we would refer you to trusted insurance agents.
If you have no insurance coverage or were denied and are now unable to pay your debts, please contact our office to set up a free consultation. See if one of the federal government debt relief options is a good fit for you.
