What is creditor insurance in Canada?
Rubina Ahmed-Haq
Paying your debts – it’s an obligation you can’t avoid. If you lose your job, get sick – or worse – pass away, your debts still need to be paid. However, one way you can protect yourself (or your loved ones) from having to make your loan payments during hard times is to purchase creditor insurance. It’s essentially a layer of protection that ensures your debts will still be paid (if you can’t make it happen).
Key takeaways on creditor insurance
- Creditor insurance helps pay off your debts (e.g. mortgage, credit card) in the event you can't – for reasons such as critical illness, disability, job loss, and death.
- This type of coverage is usually offered during the application process of your loan, but it's completely optional. You shouldn't be pressured into making the purchase.
- Although it can provide you with peace of mind, not everyone needs it. You may want to look into other types of coverage, such as life insurance and disability insurance, first.
How does creditor insurance work?
Any loan you take on (e.g. for a mortgage, line of credit, car, or credit card purchases) is due on a schedule. Depending on your loan contract, some of these may be based on a variable rate while some may be on a fixed rate. Some may also have a longer cycle with higher insurers rates charged if you can't pay in full by the due date. Creditor insurance offers protection if the unexpected happens and you can’t make these payments – this can include critical illness, disability, and death. Especially in the case of death, it protects your family from having to deal with your loan obligations.
Read: 5 reasons you should prioritize end-of-life planning (at any age)
The different types of creditor insurance
The type of credit insurance you need will depend on your own circumstances and the number of dependents you have – dependents are those who rely on your income to live and thrive (e.g. spouse, children).
According to the Government of Canada, this type of insurance is also known as:
- Loan insurance
- Credit insurance
- Balance protection insurance
- Balance insurance
- Debt insurance
You might already have some creditor insurance through your employer, so make sure you inquire about this before you take out your own policy. That way, you won't be overinsuring yourself. But also consider the fact that you could lose this protection in the event you lose your job.
What does creditor insurance cover?
Creditor insurance covers loan payments listed in your policy while you face an eligible unexpected event. For example, while you most likely won’t have your loans after you quit your job, you could potentially be covered after a layoff. As well, if you’re facing a long-term sickness that prevents you from working, you could claim the funds from your creditor insurance. This should all be laid out in your policy, so be sure to read all the terms and conditions closely.
How do you receive creditor insurance payments?
How you receive your creditor insurance will depend on your provider (and the terms of your policy), but here are two common ways you could have your debts paid.
- Lump-sum payment – In this case, your insurer will pay out your debt in one instance (on the product you have credit insurance for), up to the maximum amount listed on your policy. This is most ideal for events of critical illness or death.
- Monthly payments – If you become disabled or you lose your job, you may receive monthly payouts, instead. That way, your debt can be covered during this period of uncertainty.
Where can you buy creditor insurance?
Creditor insurance is optional and consumers should not feel pressured to buy it. This is known as coercive tied selling (which is prohibited in Canada). Usually, you will be offered credit or loan insurance at the same business where you get your loan, line of credit, credit card, or mortgage – this includes:
- Banks
- Credit unions
- Mortgage brokers
- Car dealers
- Caisse populaires
- Stores that offer credit cards
You must agree to the insurance and sign for it (this is called giving your express consent). Additionally, the premiums you pay will be dependent on your personal needs.
Looking for life insurance instead?
Aside from creditor insurance, life insurance can also give you peace of mind, knowing your loved ones will be covered during a time of uncertainty. Compare customized quotes with us to view your best rate today.
The bottom line
Whether you need creditor insurance is a personal decision. Creditor insurance is optional and should complement the other types of coverage you have (e.g. term life insurance, disability insurance, critical illness insurance). If you're carrying a lot of debt that could be passed on to others, purchasing the right creditor insurance will give you comfort, knowing those bills would still be paid.
As well, creditor insurance can be the relief you need if your income stops for reasons such sickness or being laid off. This is often a stressful time, and having one responsibility taken care of will make that time much easier to manage.
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