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Loan insurance guide

Compare loan insurance options to help cover your repayments if unforeseen circumstances leave you without an income.

Loan insurance is designed to protect your credit score and help you repay your loan in the event that you’re no longer earning an income.

Find out more about how loan insurance works and what you should know before you apply.

How does loan insurance work?

Loan insurance helps to cover your repayments on your loan if you can’t make them due to unforeseen circumstances (such as job loss, critical illness, accident or death).

It’s designed to prevent default and protect your credit score if you can no longer work or earn an income, and it typically lasts the lifetime of your loan.

Your lender might suggest loan insurance if you have less-than-perfect credit or are over the age of 65, but you’re not legally required to have it in order to qualify for a loan (except in the case of mortgage default insurance).

What are the types of loan insurance available in Canada?

Loan insurance can come in many shapes and sizes, but a few of the more common types of insurance include:

  • Mortgage default insurance. You’re legally required to buy this type of insurance in Canada if your down payment is less than 20% of the purchase price of your home.
  • Critical illness insurance. You can use this type of insurance to help you pay off or pay down a loan if you’re diagnosed with a critical illness.
  • Disability insurance. Disability insurance is used to help you make regular payments on your loan if you have an accident that leaves you unable to work or earn an income.
  • Life insurance. This type of life insurance can be used to cover the remaining amount of your loan in the event of your death.

Always do your research

Insurance policies can contain many clauses and exclusions that could prevent you from actually using your insurance in an emergency. For example, some policies won’t allow you to receive a payout if you have a pre-existing medical condition or are over a certain age. Others won’t cover you for certain health-related issues such as cancer, heart attack and stroke.

Make sure you qualify to submit a claim and know what you’re covered for before you sign on the dotted line. If you have any questions about what’s included with your insurance, contact the insurance company directly.

Factors to consider when comparing loan insurance

There are a number of factors you should compare before you sign on with a loan insurance provider to make sure you’re getting the best deal.

  • Cost. Look at how much you’ll have to pay for insurance annually and find the policy that offers the biggest payout for the lowest cost.
  • Maximum benefit. Find out what the maximum benefit is and make sure it’s enough to cover your outstanding loan (or at least a large portion of it).
  • Eligibility. Make sure you read all of the terms and conditions to avoid paying for insurance you can’t use.
  • Exclusions. Search for a lender that doesn’t void coverage in certain situations, such as if you get injured while doing a high-risk activity or contract a hereditary illness.
  • Reductions. Some contracts will determine your payout based on your age. Look for a provider that offers the same amount of coverage even as you get older.

How much does loan insurance cost?

When you get credit or loan insurance, you’ll either pay a recurring premium when your loan payment is due or a one-time premium. The cost of loan insurance typically ranges between 0.5% and 5% of the total value of your loan. The amount you’ll pay can depend on:

  • Where you live. Different provinces have different regulations that limit how much your lender can charge you for loan insurance.
  • Loan amount. You’ll usually pay more for larger amounts.
  • Loan term. Longer terms are often more expensive than shorter terms.
  • Insurance type. Different types of insurance need different amounts of coverage. For example, you’ll pay less to cover a short-term disability than you will to cover a lifelong critical illness.
  • Demographic. How much you’ll pay can also depend on your age and health, with younger borrowers netting lower premiums.

Are you eligible for loan insurance?

To be eligible for loan insurance, you’ll often need to be between the ages of 18 and 70. Your provider may also ask you to respond to a short health questionnaire. If you’re deemed healthy, you could be approved straight away. If there’s any uncertainty about your health, they may need you to take a more comprehensive medical exam.

It’s important to answer as truthfully as possible on the medical section of your application. If you don’t, you risk not being eligible for your claim even if you’ve paid your premiums.

How to distinguish between real loan insurance and an insurance scam

If you’ve decided to take out loan insurance, it’s important to know the difference between what’s real and what’s fake. Learn how to avoid a personal loan scam and keep these golden rules in mind to help protect yourself:

  • Never pay money up-front. It’s illegal for a lender to ask you to pay any kind of deposit before you receive the full amount of your loan.
  • Avoid offers that are “too good to be true”. If a provider offers terms and rates well below the national average, chances are they’re running a scam.
  • Stay away from untraceable payment methods. Be suspicious if your lender asks you to send cash via Western Union or pay for fees using a prepaid debit, credit or gift card.
  • Steer clear of unsecured websites. Don’t put your information into a website that doesn’t start with https:// (with the “s” at the end indicating that the site is secure).

Bottom line

If you’re concerned about your ability to pay back your loan due to unforeseen circumstances, you may want to consider loan insurance. Use this guide to find out if this type of insurance is the right fit for you.

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