Loan and credit insurance, otherwise known as “creditor insurance” or “debt insurance” can be used to pay off the balance of a loan in the event of a sudden illness, accident, disability, or death. So, if you should pass away or become unable to work due to one of these circumstances, your insurance provider will help cover what you owe to your lenders or creditors.
However, it’s important to know that loan insurance varies from loan to loan, meaning you need to open a separate insurance policy for each loan that you have. The terms of a mortgage loan insurance policy will be different from the one you’d receive for say, credit card balance insurance. So, before applying for whatever loan insurance you might need, it’s important to understand your options.
Loan insurance provides coverage for some or all of your loan payments if you’re unable to continue paying due to a covered illness, injury, disability, or in the event of death.
If you agree to loan insurance, your premiums will be added to your loan amount. Every time you make a loan payment, part of the amount goes toward your premium to keep you protected in case an unexpected event happens.
Loan insurance works in a couple of different ways, depending on the loan balance you want to cover:
If you suffer a critical illness or pass away at any point throughout your loan term, your loan balance can be entirely covered — up to a specific amount as outlined in your Certificate of Insurance — with a lump sum payment from your insurer.
If your income is significantly reduced as a result of a disability, labour strike, or involuntary job loss, your policy will cover your monthly payments toward repaying your insured debt for a specific time period.
There are a few different kinds of loan insurance to consider, including the following:
When you’re approved for a new credit card, the company you’ve signed up with will offer you credit card balance insurance. If you should lose your job, fall ill, or have any other type of injury that prevents you from working, this type of insurance will usually cover all or a percentage of your monthly balance on your credit card bill for 10-24 months. If you should become physically disabled or pass away, the insurance will then cover the entirety of your outstanding balance or up to a specified amount.
Talk to your credit card company to see if you qualify for credit card balance insurance.
Critical illness insurance will help cover the remainder of your loan and credit payments in the event that you are stricken with a serious illness that prevents you from working. The full list of illnesses will be specified within the terms of your insurance policy. However, there are several specific illnesses that are typically not covered if you have them before you qualify for this type of insurance.
Disability insurance, on the other hand, will not necessarily cover the entire cost of your loan and credit bills. Instead, the minimum balance of each payment will be taken care of in the event of a sudden sickness or accident that physically disables you and makes you unable to earn an income. This policy will also only last a certain length of time, and once the coverage period has ended or you recover fully from the disability, you will again be responsible for remaining balances on your loan or credit line. As it would be with other forms of insurance, your ability to qualify will vary depending on the terms set by the insurance provider.
Not to be mistaken with typical life insurance, in the event of an insured borrower’s death, the insurance provider will use part of, or the total value of the “death benefit” towards paying the remaining balance of their loan or credit product. The premium you would pay to your insurance provider will fluctuate in accordance to the type of loan that needs to be paid. However, the amount that would be taken from the death benefit will decrease as you continue to make payments and reduce what remains of your loan debt.
Because of this, it’s very important to note here that your family or beneficiaries will not receive the full death benefit if your loan has not been paid by the time of your death. So, if you want to leave a separate amount aside for your loved ones in the unfortunate event of your passing, that you’ll need to purchase a separate life insurance policy to go with it.
When potential homebuyers can’t afford to make a down payment of more than 20% of the initial asking price of a house, which is common, lenders will require them to qualify for and then purchase Mortgage Default Insurance. In Canada, the minimum down payment on a house costing $500,000 or less is 5%. The insurance costs will help cover any payments that are defaulted by the borrower, protecting the investment made by the lender and allowing them to offer the client lower interest rates.
In Canada, there are three companies that provide mortgage default insurance: CMHC (Canada Mortgage and Housing Corporation), Genworth Financial Canada, and Canada Guaranty. Depending on the size of the down payment, the mortgage default insurance you have to pay will vary.
| Down Payment Size | Premium Charged |
| 5% | 4.00%(for a traditional down payment) 4.50% (for a non-traditional down payment) |
| 10% | 3.10% |
| 15% | 2.80% |
| 20% | 2.40% |
| 25% | 1.70% |
| 35% | 0.60% |
When you’re thinking about applying for a loan and getting insurance with it, you need to be able to distinguish between an official policy and the fake ones dealt out by scam artists posing as lenders.
Many fake lenders will claim that loan insurance is mandatory in order for you to get the loan. However, loan insurance is not mandatory and no legitimate lender will ever ask for a payment upfront. In fact, asking for any kind of insurance or security deposit before a borrower receives their loan is illegal.
Loan insurance is optional, so why should you consider paying a little extra for it? Here are a couple of reasons:
Financial protection. Job loss is among the leading causes of insolvency. With loan insurance, you can protect your financial future in the event that you can’t keep up with your loan payments due to involuntary unemployment.
Credit score protection. Loan insurance can also protect your credit score if you find yourself going through a difficult financial situation. By helping you to keep making your loan payments on time, loan insurance can ensure that your credit score is not negatively affected.
Follow these steps to file an insurance claim:
Your first step is to get in touch with your insurance provider right away to inform them of your situation. The name of your provider should be listed in your Certificate of Insurance.
You will be required to complete specific claims forms and include as much information as possible to help the insurer make an accurate decision about how much you’re eligible for. Depending on your situation, you may also be required to undergo a medical exam.
Be mindful of when you complete and submit your claims form and the date of your injury, diagnosis, or disability. Most insurance policies require that claims be made within a specific timeframe, which can range anywhere from 90 days to up to a year.
If your claim is approved, the insurance provider will pay out your benefit. Keep in mind, however, that you will not receive the funds yourself.
Instead, the insurance benefit will be paid to your creditor or lender to pay down your debt. For instance, if you still have an outstanding credit card balance, the benefit will be paid to your credit card provider to pay off your balance.
Not all types of insurance are absolute requirements, but it can be very beneficial to both you and your loved ones to consider them. While you’re in good physical, mental and financial health, it can seem like loan insurance is not a necessary thing. However, paying a premium for any kind of insurance is the same principle as having a rainy-day fund set up, just in case any kind of emergency should arise, whether it be a medical emergency or a financial one.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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