Are Homeowners Properly Insuring Their Increasing Debt Loads?
These days, it seems like debt is the norm. Instead of it being the "elephant in the room," it's all everyone talks about ─ the bragging rights one obtains from taking out a loan to buy a luxury car, or funding a vacation trip entirely on credit.
According to a survey by Manulife Bank of Canada, homeowners are more comfortable with both holding and talking about their debt than their parents were.
"Recently I've noticed people are happy to talk about their debt as if it's an achievement, almost like it's a status symbol," Personal Finance Expert Barry Choi remarks in his article. "Having the attitude that debt is normal, or 'everyone has debt so it's okay' is the last thing we should be thinking."
This kind of thinking could be attributed to "our current low interest rate environment, which makes debt management seem less intimidating than it was in the '80s and '90s, when rates were much higher," says Jason Daly, VP Product, Marketing & Business Development, at Manulife Bank.
Atlanta-based business consultant Paul Paetz, though, sees dark waters ahead. Unlike Canadian economists, he expects Canadian mortgage rates to rise fast and potentially have a huge negative impact on the real estate market.
Canadian homeowners don't seem to share the same concern. The survey states that 39% of homeowners feel more comfortable holding debt compared to previous generations, as opposed to the 13% who feel less comfortable.
This newfound confidence isn't to say that Canadians are becoming better at handling their debt. In fact, 38% of Canadians believe that it will be harder for them to become debt-free than their parents, compared to 23% who think it'll be easier.
The reason behind this discrepancy is our generation's new (and false) definition of what debt truly entails.
Mortgage Debt is Debt, Too!
When we talk about "debt load" or "household debt," we mean the total amount of debt a consumer owes to financial institutions. This includes any consumer debt — such as bank overdraft, credit card debt, and financed loans like car purchases or personal lines of credit — and (our favourite) mortgage loans.
Of homeowners in their 20s, 68% don't take into account mortgage debt when they think about their debt, compared to 60% in their 30s, 48% in their 40s, and only 29% in their 50s.
The reason is that young homeowners may be more swamped with high-interest debt, like credit card debt. Credit card debt is tricky in the sense that leaving even $1 on your credit card will mean you end up having to pay interest on your entire balance.
While paying off debts with the highest interest rate first is a great way to reduce personal debt, let's not forget that your mortgage debt still exists.
Insuring the Debt Load
With the ever-increasing debt load, my best advice to any Canadian family would be to try and bring down their household debt while employing the services of a financial planner to make them aware of the best options available to protect their family financially.
A life insurance policy is a great place to begin. When you first bought your home, your lender might have suggested mortgage insurance to protect your new asset. But what you didn't know is that there are cheaper individual insurance policies out there that offer so much more flexibility.
Unlike mortgage insurance obtained through a lender, which has declining coverage and lower payouts, a term life insurance policy offered through a life insurance company is affordable and puts you in control of your mortgage protection. The proceeds from a term insurance policy are paid to your beneficiaries, who can then use the money however they deem appropriate ─ such as paying off high-interest credit card debt first. As long as you continue to pay your premiums, your coverage will remain in force, regardless of the status of your mortgage changes.
Disability insurance can also be a good option. If an accident leaves you unable to work, your mortgage won't be the only thing on your mind. Disability insurance replaces your income, enabling you to pay off medical expenses and pay the bills while focusing on healing and getting back to normal.
For more details on life insurance to protect your debt load, please contact us at 1-866-899-4849 or visit our term life insurance quote page.