Should You Insure Your Line of Credit?

Posted on April 2, 2013 and updated December 4, 2018 in Insurance Types, Life Insurance Canada News, Permanent Insurance, Term Insurance 3 min read

The average personal debt in this country has increased by 6 per cent to $27,485, and many people have chosen to tackle it by taking out lines of credit so that they can avoid the high interest rates that often come with credit cards.

The interest rates are usually between 1 and 3 per cent above the bank’s prime rate, versus up to 28 per cent for some department store credit cards. Still, the rates are variable and rise and fall depending on your bank’s prime rate, so it’s important to be aware of this variability.

There are two types of lines of credit for individuals: unsecured and secured. A secured line of credit is backed by GICs, or the equity in your house. Secured lines of credit give you a higher limit and a lower interest rate because they lessen the risk to the bank.

Insurance is available to cover your credit line payments in the event of an injury or death. You can purchase it through the bank that lent you the credit or through an insurance company, which may give you a cheaper price. But is this an insurance policy you should really invest in? There are a few things you need to remember if you’re considering line of credit insurance that may greatly influence your decision.

1. The coverage is not portable: You cannot move your insurance policy from one bank to another, so you will have to reapply to get a line of credit at a new lender. And if your health has changed in the years since you bought the original policy, you may not qualify for the new policy. 

2. Non-smokers and smokers are priced the same: With individual life insurance, non-smokers receive a discounted premium versus smokers, but this isn’t the case when it comes to credit insurance.

3. Preferred rates are not available: When buying life insurance, those with excellent health and an excellent family health history would qualify for preferred rates, which could translate into a savings of up to 30 per cent on your premiums. However, when buying credit line insurance, your excellent health counts for nothing, and there are no health-related discounts available.

4. Coverage is not convertible: Some life insurance policies can be converted to a permanent plan without further medical evidence, which makes it easier to increase your coverage duration after the term on your policy expires — especially when your medical circumstances have changed and it would otherwise be difficult to qualify for a new policy. Line of credit insurance has no such feature, and once the credit line is paid off, the insurance policy terminates without value.

5. Cash value features are not available: Most permanent life insurance plans have an investment feature, which gives the policyholder a return of their premiums and very often the interest on those payments. This option does not exist with line of credit insurance. 

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Ami Maishlish
Ami Maishlish

In response to the question “How does line of credit insurance differ from mortgage insurance” The main difference is that a Line Of Credit (LOC) is an amount that the borrower is APPROVED TO BORROW but is not necessarily equal to the amount that is actually borrowed at any given point in time. The interest on an LOC is also calculated on a monthly compounding basis whereas the interest on a standard Canadian residential mortgage is normally calculated semi annually not in advance. A normal mortgage is setup to be amortized (theoretically scheduled to be paid off) in X number… Read more »

Progressive Thinker
Progressive Thinker

How does line of credit insurance differ from mortgage insurance?

LSM Insurance
LSM Insurance

They are actually quite similar. If through a lending institution the coverage is linked to your mortgage or line of credit.

Roddick
Roddick

My line of credit has increased to $325,000. I’m 61 male non smoker no major issues. Can you give me a quote with clear options and desciption not alot of jargon.

LSM Insurance
LSM Insurance

Thanks for note Roddick. The premiums will depend on the type of plan Term or Permanent, your actual date of birth some companies use age nearest pricing.

We will send you a separate email now.

Harold
Harold

Can I still insurace with you for my line of credit I’m 73 and healthy as a horse but the bank says I’m too old. I am on a fixed income.

LSM Insurance
LSM Insurance

Thanks for the note. Good to hear your doing so well – yes Term 10 policies are available to applicants 75 and under and Permanent policies to applicants 85 and under. The premiums depend on your age, smoking status, health, type of plan and coverage amount. We will send you a separate email now.

LSM Insurance
LSM Insurance

Thanks Ami – you make some excellent points.

Ami Maishlish
Ami Maishlish

Good article, Chantal. I’ll expand on this: 1. “The devil is in the detail” Does the Line of Credit (LOC) insurance cover the outstanding amount of the loan at time of death OR the average amount of the loan outstanding during the month? For example, if one had a zero balance on his loan on July 1st – July 24th, but then borrowed $100,000 from the insured LOC on July 25th, and was killed in a car crash on July 31st, would the loan be paid off by the insurance? Well, it depends: If the LOC insurance contract stated that… Read more »