Creditor insurance or term life insurance. Do you know the difference?
Managing your money and navigating the financial maze can be challenging. November is Financial Literacy Month. We’re offering guidance on our blog to help Canadians make smarter financial decisions. This week, we explain the difference between creditor insurance – insurance offered through your bank, and life insurance from an insurance broker.
The general purpose of insurance is to provide peace of mind if something unexpected happens relieving your loved ones of the burden of debt.
If you get a mortgage, a line of credit or another type of loan, your financial institution will most likely offer you creditor insurance. Creditor insurance is any insurance through your bank. Depending on the type of loan, it can also be called mortgage insurance or loan insurance. Creditor insurance is designed to pay off the balance of your loan or mortgage in the event of your death.
While the goal of creditor insurance and life insurance is essentially the same, there are some key differences that you need to be aware of before deciding which is right for you.
Ease
Creditor insurance can usually be arranged at the same time as when you sign your mortgage or loan papers. The premiums are simply added to your mortgage or loan payments.
Life insurance is a longer, more involved process, and you make payments to your insurance company, rather than to the bank.
Eligibility
Most customers are automatically approved for coverage after answering a few basic health questions. However, creditor insurance policies use post-claim underwriting. That means that after a claim is made, the insurance company will look more closely at your medical history. If a previous health condition is found, whether you or your doctor were aware of it when you signed the loan papers, your claim could be denied. So even though you paid your premiums, you may not be covered after all.
To qualify for life insurance, you may need to provide a blood or urine sample upfront, and the insurance company may contact your doctor. However, if your loved ones need to make a claim, they should receive full benefits with no further investigation required.
Beneficiaries
Creditor insurance protects your lender. If you die suddenly, your lender receives the benefits from your policy – not your family.
With life insurance, you decide who the beneficiaries of your insurance coverage are.
Flexibility
Creditor insurance is inflexible. Benefits from the claim are used to pay off your debt with the bank.
With life insurance, your beneficiaries decide how to use the payout. For example, if your loans are significantly reduced over the years, perhaps the benefits are used to pay for an education or other high-interest loans.
Value of coverage
With creditor insurance, the value of your insurance coverage is relative to the amount remaining on the loan or mortgage. As you pay down your debt, the amount of your coverage reduces with it.
The value of your life insurance remains the same throughout the term of your policy.
Portability
If you change lenders or sell and buy a new home, your creditor insurance policy is terminated. You’ll have to apply for a new mortgage insurance policy.
Life insurance stays with you, regardless of where you move, because it’s attached to you, not your debt.
Cost
Depending on your age and your health, premiums on creditor insurance are typically higher than on term life insurance. And the quoted premium may only be valid for one year.
Your life insurance premiums remain the same for the length of your term – usually 10 to 20 years.
If you don’t have or don’t quality for life insurance, creditor insurance may make sense for you. If you already have life insurance, it may be more cost-effective to simply increase your coverage to include your mortgage or loan payment. You decide. If you need advice, your insurance broker will be happy to speak with you.
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