You’ve probably heard about how we’re dealing with record debt levels in Canada, but how does this impact life insurance companies and you as an individual or family?
To help answer this question, we’ll take a look at how the debt level is calculated, how it affects Canadians, and how it impacts life insurance companies.
How Debt Level is Calculated
The two factors used in the debt level equation are household credit and disposable income.
• Household credit: Credit such as mortgages, credit cards and other loans
• Disposable income: The money left over each month to either spend or save
It’s important to note that the percentage of disposable income is used by governments and economists to measure the state of an economy, overall. Debt imbalances are chiefly measured by the ratio of total household credit compared to disposable income - and in the fourth quarter of 2014 that ratio hit 163.3%.
Another factor considered is the rate that debt and income grows. In the last quarter, debt moderated to 1.1%, but disposable income only grew 0.5%. Which is partially being blamed on the effects of lower oil prices.
The good news is that experts think Canadians will be able to handle their debt, in part because of lower interest rates and a surge in real estate. As well, household savings (in broad terms) has grown – net financial assets, have almost doubled to $3.7-trillion. This sum is calculated by taking household debt and subtracting all cash, deposits, bonds, stocks, pension assets and life insurance.
Record Debt Levels and Their Impact on Life Insurance Companies – the Solution
The solution to the issue of slow income growth that also saves Canadians money each month, is to purchase individual life insurance instead of paying for mortgage, or line of credit insurance. As you will see below, there are many benefits to buying individual life insurance instead of mortgage insurance.
Purchasing Mortgage Insurance vs. Individual Life Insurance
• The bank owns the mortgage insurance policy; but with individual life insurance, you own the policy and can choose your beneficiary.
• With the bank’s life insurance policy you pay for declining insurance – because as you pay off your mortgage the amount owing decreases, and so does the insurance payout. With your own policy you have a level benefit for the life of your term.
• With a mortgage insurance policy most of the underwriting is done at the time of the claim; which essentially means that they will decide if they will payout the policy when the claim is made. With individual life insurance policies, the underwriting is done in advance.
• If you change lenders you lose your mortgage insurance with them, but you can keep your individual life insurance policy, because it isn’t tied to your lending institution.
As you can see, the impact of record debt levels on life insurance companies is beneficial to Canadians - individuals and families. Which directly effects our economy in a positive manner.