Peter Boys, Boys Financial Services

Life Insurance, Disability Insurance, or Creditor Insurance?

Risk Management1

When is it most beneficial to obtain creditor insurance, disability insurance, and/or personally-owned life insurance..?

I want to reinforce some things I’ve mentioned before about the pitfalls of life, critical illness or disability coverage for mortgages, loans, and lines of credit offered by banks, auto dealerships, and other lenders.

Creditor coverage pays the lender if the borrower dies before the loan is paid off.  It’s an add-on product, and some salespeople might imply that it’s required in some situations.

Creditor coverage is of more benefit for the lender than for you.  You are paying for the lender’s protection.  Creditor insurance only pays for the outstanding loan balance, not the original amount borrowed.

Other products cover you in case you become disabled or unemployed.

Disability coverage for credit cards usually only pays the minimum monthly balance, so you are still charged interest on the balance carried over each month.

Premiums for these are rolled into your loan payments, so you might not notice that you’re paying for something extra.

Here are some things to keep in mind the next time you visit a bank for a loan or an auto dealership.

  • Credit life insurance nearly always costs more than regular life insurance for the same type of coverage.
  • The lender is the beneficiary of any proceeds paid out, not your family.
  • The coverage is cancelled when the outstanding loan is paid off.  A policy covering both spouses would ensure the survivor still has coverage.
  • An undisclosed or forgotten health issue at time of application could be reason for the insurer to deny the claim, leaving the spouse or partner stuck with the debt.
  • Credit life insurance is not a requirement for taking out a loan, but you may be pressured to buy it as if it was.
Is creditor life insurance necessary?

Debt does not go away on death.  But unless a family member’s name is on the loan with yours such as a mortgage, it’s very unlikely that a survivor would be required to pay off the loan’s remaining balance in the event of your death.

As a financial advisor, I believe that personally-owned coverage is a much better option for many reasons.

  • You should have enough coverage to cover off more than just your debts.  A death can trigger a need for both short and long term cash, and you may not have enough liquid assets to meet those needs.  A personally owned life insurance policy usually pays out in less than 30 days.
  • Your beneficiaries can choose if it’s beneficial to pay off certain debts or not.
  • Underwriting is done at time of application, so if approved, you know you are covered and the insurance company cannot cancel your coverage as long as the premium is paid.
  • You may have other reasons to have life, critical illness or disability than to cover just your loans.  Your protection does not end when your loans are paid off.

Before you sign any loan papers, review them carefully.  Ask what is included in the payment.  If you don’t want their coverage, tell them.  If a lender tells you that you’ll only get the loan if you buy their coverage, go elsewhere or report them to the Alberta Insurance Council.

Consumers should ask these same questions for other products such as auto or shopping clubs, home or auto security plans, and debt cancellation products.

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