Line of Credit Insurance: Is it Worth it?

According to The Canadian Encyclopedia, The average Canadian owes $340,000 spread over a mortgage, three lines of credit and two credit cards. However, Line of Credit insurance, like mortgage insurance, generally does not provide the consumer with a very good value. The coverage declines as your line of credit declines. Additionally, it offers the following disadvantages when compared with term life insurance:

1. The coverage is not portable. If you move your line of credit from one institution to another, the coverage is not portable. If your health has changed, it may be you have difficulty re-qualify the coverage. Take the example of someone who develops diabetes subsequent to taking out their line of credit insurance. If they have to apply for a new plan down the road coverage may not be available or it may only be available with a heavy rating due to their diabetes.

2. Non-smokers and smokers are priced at the same rate. With individual life insurance, non-smokers receive a discounted premium when compared with smokers. The discount can be as as 60%

3. Preferred rates are not available. For individuals in very good health, line of credit insurance offers an even worse value.  Preferred rates are available through most life insurance carriers for applicants who are in very good health and have good family health history. Preferred rates can translate into savings of up to 35%. 

4. Coverage is not convertible. Line of credit insurance does not offer a conversion feature. Once the line of credit is paid off, the coverage terminates without value.  Individual term life insurance policies are generally convertible – meaning the insured can exchange the plan without a medical (at the best possible classification) to a Permanent plan.  This can be a huge benefit, if the insured has had a change health and otherwise may find it difficult to qualify for new insurance.

5. Cash value features are not available on Line of Credit insurance. Individual life insurance policies can be sold on a term basis or a permanent basis. Permanent policies often have an investment component attached to the plan, allowing the insured to have a return of premium feature. Some companies offer a wide of investment options on their plans from low risk guaranteed investment accounts to higher risk speciality funds.  BMO Insurance for example offers over 400 different funds on its Universal Life plan.

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