Canadians Need More Life To Cover Their Increasing Debt Load

life insurance canadians increasing debt load

According to a recent report in the Investment Executive, Canadians are accumulating more and more non-mortgage debt, however delinquency rates remain. The rise in debt is partially attributed to historically low interest rates.

Frances Wooley, professor of economics at Carleton University, says that most people with too much debt already know they may have a spending problem, so trying to tell them to control their spending has minimal effect. Just about anyone can get a credit card and businesses make using that card quick and easy with a simple tap.

Boomer and Echo agree, “There’s been a lot of attention in the media about the high level of consumer debt Canadians are indulging in compared to their disposable income. Easy access to inexpensive credit and little stigma attached to being in debt, as well as the pressure felt to keep up with society’s image of success makes overconsumption a growing problem when people spend a lot more than they are earning.”

A post in My Own Advisor states, “Recently Statistics Canada announced that the ratio of household debt to disposable income in households rose to record levels. Credit cards are the usual suspects when it comes to debt, with mortgages and lines of credit along for the ride. I suspect it’s easy for folks to fall behind on debt payments because using credit is just so damn easy.”

Earlier this year Big Cajun Man commented, “The simplistic explanation overall is that Canadian assets have been increasing in value, with the housing bubble (in many areas, not Alberta though), the recovering stock market and the recovering loony as well. Are we actually saving more? I doubt it, I do believe that we are further in debt though (so yes I am agreeing with many financial pundits who are sounding warnings from this data). The fact that debt is increasing vs. our disposable income is a more sinister issue.”

Statistics state the average debt-income-ratio in Canada is 166.1%. How does this compare to other countries? Not very well. According to the most recent stats available:

Canada – 166.1%
USA – 113.4%
UK – 155.7%
Japan – 129.2%
Germany – 93.6%
France – 104.7%

To find your own debt ratio, add up your total debt (the balances owing on your mortgage, car or personal loans, credit lines and credit cards) and calculate what per cent the total is of your annual net income. However, this calculation doesn’t give you a fair picture. It doesn’t take into account your assets or home equity and the national average lumps everyone together – including people without any debt.

Rob Carrick, personal finance columnist for the Globe and Mail explains this further, “Though it’s bandied about frequently in the press, the debt-to-income ratio is limited when it comes to measuring one’s own financial health. For one thing, it doesn’t take equity or assets into account. Also, it measures things that are not directly comparable, namely your entire debt load vs. one year’s net pay (one would hardly be expected to pay off all your debt in one year, right?). Another flaw in the debt-to-income ratio is that it lumps together people who have no debt with those who are heavily indebted, so you get seniors who have paid off their mortgages combined with Vancouver and Toronto residents and their mega-mortgages.”

Mr. Carrick explains that the debt-to-income ratio is a tool used by economists to get an overview of the household debt situation in Canada. Unless you can directly compare your debt ratio to people in the same financial position as yourself, the measurement is meaningless.

Is Your Debt Load Too Great?

Consolidated Credit Counseling Services of Canada has a different method of measuring your debt-to-income ratio in order to determine whether or not you are financially sound.

Take your total monthly debt payments (just the payments, not the entire outstanding balance), including rent or mortgage, minimum credit card payment, car payments, and divide the total amount by your monthly household income, then multiply this amount by 100. This method is considered more accurate because it directly compares how much is coming in each month and how much is going out.

According to Consolidated Credit, 36 per cent or less is a healthy debt-to-income ratio. Anything between 37 and 49 per cent should cause some concern and anything over 50 per cent means you might want to consider professional help to reduce your debt load.

Insuring Your Debt

Lenders want to know your mortgage, loan or credit card will be paid in case of an untimely death, that is why they all offer life insurance. The problem is, the amount of insurance only covers the amount of debt. This means that as you pay off your debt, the payout gets lower and lower. They hope that you will pay off your loan before you die. This way they collect life insurance premiums for all those years, but never have to pay out a cent.

Even though the insurance amount declines along with the outstanding balance, the premiums stay the same. With a term life policy, the premiums also stay the same, however the coverage amount never declines. If you buy a $100 000 policy, it will be a $100 000 policy to the end. Your beneficiaries can pay off your debts, plus have some left over for other expenses.

Other drawbacks of creditor insurance:

  • The insurance is only good with that particular lender. If you change banks, cancel your credit card or refinance your loan, you will have to apply and qualify for a new insurance policy, and the rates could be significantly higher because you will be older and your state of health may have declined.
  • Creditor insurance is more expensive, however qualifying is easier with little to no medical tests or questions.
  • You can’t choose the beneficiary. The money goes directly to the lender to pay off your debt.
  • The insurance policy is not portable, it stays with the lender. An individual life insurance policy from an insurance company stays with you, even after become completely debt-free.
  • Creditor insurance is not convertible to a permanent insurance policy. When you have your own policy, you can convert it into a permanent policy to provide lifetime protection and generate a cash value.

The best thing you can do for your loved ones is to buy an individual insurance policy. This will give them enough money to pay off all your debt, cover final expenses plus have a little extra to help them adjust to life without your income.

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