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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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 of years, for example 15, 20 or 25 years, with the periodic payments set in accordance with the amortization schedule. An LOC in contrast is not amortized, doesn’t have to have a principal loan amount outstanding, may be paid “interest only” if there is a borrowed amount, and is normally callable by the lending institution. Moreover, an LOC normally has a variable interest rate that can be revised by the lender from time to time whereas a normal mortgage has a fixed interest rate for the term (variable rate mortgages as the name implies, excepted).
The insurance amount for an LOC follows the amount that is outstanding on the LOC loan and can therefore go up and down in accordance with the amount (if any) that is borrowed through the LOC. LOC insurance is EXPENSIVE, very expensive by virtue of its design as well as on a cost per $100 basis.
Unless the consumer cannot qualify for individual insurance coverage, in nearly all cases the consumer is better off and will receive substantially more in terms of value for the premium dollar by engaging the services of a duly qualified, licensed and resource equipped insurance and financial planning professional.
How does line of credit insurance differ from mortgage insurance?
They are actually quite similar. If through a lending institution the coverage is linked to your mortgage or line of credit.
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.
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.
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.
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.
Thanks Ami – you make some excellent points.
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 it covered the total outstanding amount of the loan on the date of death, July 31 in this example, then yes (subject to contractual provisions, limitations and exclusions); however:
If the LOC insurance covered only the “average daily balance of the loan during the month” then:
-July has 31 days
-The balance on the loan for the 24 days (Jul 1 to Jul 24 was zero)
-The balance of the loan for the 7 days (Jul 25 to Jul 31 inclusive was $100,000)
–So we have the following calculation for the amount of insurance: (24*$0+7*$100,000)/31=$700,000/31=$22,580.65. In other words, under such wording only $22,580.65 of the $100,000 plus interest outstanding on the loan would be covered by the LOC insurance. Oooops!
Now, under the “average daily balance…” wording, let’s take the reverse, if one had an outstanding balance of $100,000 on the LOC during the period of Jul 1 to Jul 7 but paid off the entirety of the loan as of the close of the business on Jul 7th and then had a $0 balance on the loan when killed in a car crash on July 31st, what then? This one is not as easy as the first, because the devil is in the details of the actual insurance contract… read on…
2. Insurance is a legal contract that sets out the scope and detail of the risk transfer agreement between the “insured” and the “insurer”. In life insurance contracts, the financial risk of death is transferred from the insured to the insurance company, with an agreed upon amount of compensation by the insurance company in the event of death during the contract period, and in exchange for a risk transfer fee (the insurance premium).
The insurance contract also sets out additional terms, conditions, limitations and exclusions and also includes the completed application for the risk transfer (“insurance”). It is also subject to the statutory requirements for contracts, plus the additional requirement of utmost good faith (including “the full truth in detail, and nothing but the truth” on the application for insurance by the insured).
Insurance contracts, as well as the application forms that are deemed to be part of the contract when completed, are written and/or vetted by lawyers and sold to the general public. These are usually long, detailed and particularized documents that are not necessarily easy to understand.
Normally, LOC life and/or critical illness and/or disability insurance is evidenced by a Certificate of Insurance that is subject to the terms, conditions, limitations and exclusions of the Master Insurance Contract. In a practical sense the structure creates a “Certainly hopefully maybe” scenario where the only certainty is that the insurance premiums are payable while the likelihood of insurance compensation in the event of death, critical illness or disability is unknown until after the event. Issues to keep in mind in this regard are:
a. The Master contract, to which the Certificates of insurance are subject, is generally unavailable and undisclosed to the consumer. Yet, the consumer is bound by its terms, conditions, limitations and exclusions. Those terms, limitations, conditions and exclusions; however, are employed to deny claims. Questions to the reader:
-Would you ever willingly enter into a contract that was not disclosed to you and to which you had no access?
-If you are covered by LOC insurance or are considering the purchase of such coverage from the bank, have you tried to obtain a true copy of the Master contract?
–Assignment for the “brave and tenacious”: Try to obtain, read and understand the Master contract of LOC insurance.
b. Since it is expected by the insurer (insurance company) that the premiums collected will far exceed the cost of claims, overhead, sales commissions to the bank, etc. – and to save on costs and increase profits – approval of application to pay premiums for LOC insurance is generally based on a “filtering”/”automated underwriting” method. The “filtering”/”automated underwriting” method is a low-cost, quick process, that is reliant on the understanding by the consumer of the questions and on information provided in the application form.
In other words, IF the insurance would be issued based on the information in the application form, the collection of premiums and issuance of the certificate is approved. The actual process of underwriting (determining whether the risk actually qualified for transfer-in acceptance) is done once a claim is received. That’s the point in which the absolute veracity and completeness of the information submitted on the application is investigated, along with the details of the event that gave rise to the claim. From the insurer’s perspective, it makes economic sense to “filter”/”automatic-underwrite” applications for insurance where the probability of successful claim is low. On the other hand, when faced with an actual claim for a substantial amount, it makes economic sense for the insurer to thoroughly investigate whether issuance of the coverage would have been acceptable had they thoroughly investigated acceptability when the application was made – and also whether a claim is still payable under the terms, conditions, limitation and exclusions of the contract.
c. [NOTE: The following figures and examples are based on rates that are current in Canada as on April 01, 2013] Cost: Instead of the word “cost”, the better term to use would be “value” (see foregoing). To establish an example for this, I chose to check the cost per $1,000 of LOC insurance sold by one of the top 5 banks for a female born Oct 5, 1970 in average health – a person who would be eligible as “Regular”/”standard”, but not “preferred”, “non-smoker” class rates for individual life insurance, for $200,000 of coverage. The bank that sells the insurance states that “coverage rates are based on your average daily outstanding balance during the billing period…” The rate quoted for the LOC insurance by the selling bank on its website is $0.41 per $1,000 per month, increasing in 5-year age-based increments. On an annual basis, this works out to 12*$0.41=$4.92 per $1,000 of coverage. So, for $200,000, and based on figures published at the bank’s website, the annual cost would be $200*$4.92 “plus tax, where applicable”. Ignoring the tax for a moment, the total works out to $984.00 (before the additional tax).
Now, to compare this with individual, 10-year renewable and convertible term insurance on the same person (note that the bank’s offering goes up in price every 5-year increments of age whereas the comparison is made to better structured 10-year term where the increases in cost are half as frequent, at 10-year intervals rather than 5):
-Using WinQuote (WinQuote is the most objective and totally independent pricing information resource for consumers on the Internet, including the largest number of insurers and products https://www.winquote.net ), the 6 most competitive offerings range in annual costs from $188 to $230; but,
-Using LifeGuide (LifeGuide is the most advanced and most comprehensive independent multiple insurer life insurance research resource for professional insurance advisors, and hence includes numerous functions and capabilities that are not provided elsewhere), the most competitive offerings found with LifeGuide range in annual costs from $180 to $213 (Note: LifeGuide includes the “Age Awareness” function. This function in LifeGuide was invoked to reveal the lower costs that are available for this example at this date, hence the even lower costs, without change in demographics or underwriting class found with LifeGuide)
Now, what amount of 10-year renewable and convertible term insurance could the lady in this example get for the $984 per year that would be charged by the bank for $200,000 of 5-year term insurance coverage? Using LifeGuide, which is also the only independent multiple company life insurance research resource that includes the OptiSearch functions, we find that the $984 annual premium could purchase as much as $1,976,097 – yes, nearly two million dollars of individual, 10-year renewable and convertible term insurance coverage for the same $984 annual premium. Once we add the tax that would be payable on her $984 LOC insurance premium and OptiSearch in LifeGuide using the total cost figure, we find that she could purchase well above two million dollars worth of 10-year renewable and convertible insurance on an individual basis. Yes, that’s ten times as much, fully underwritten at issue, with the entirety of the contract of insurance provided and fully disclosed at or prior to issue, and including the services and attention of a duly licensed, E&O insured and properly equipped life insurance professional.
Now, why would one want to receive only one-tenth of the coverage for the money? …and why would one buy insurance that fluctuates, that may not provide any coverage at all when needed, where the contract is not fully disclosed and which does not include the services of a duly licensed, E&O insured and LifeGuide-equipped life insurance professional?
Perhaps a possible answer would be that one would do so if one did not qualify for individual life insurance; however, would such a person qualify for an honoured claim under the LOC insurance scenario? Perhaps one of the bankers would care to answer?