Loan insurance guide

It’s hard to predict what will happen after you take out a loan. In the worst-case scenario, you could lose your job, have an accident or get critically ill and be unable to work. Loan insurance is designed to cover your loan payments if you can’t make them – but it can be expensive and may not be worth the cost, depending on your budget.

What is loan or credit insurance?

Loan insurance (also known as credit insurance) is a form of insurance coverage that will pay off your loan or help you make your loan or credit card payments if you experience job loss, critical illness, a serious accident or some other covered emergency. It’s designed to prevent default and to protect your credit score. 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 it’s 100% optional. You should never feel pressured into buying it, and it should not be used as a condition to approve your loan. The only exception to this rule is mortgage insurance since you legally need to buy it if you have a down payment of less than 20%.

What are the different 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 the following:

• 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 helps you make regular payments on your loan if you have an accident that leaves you unable to work or earn an income. This is also called credit health or accident insurance.
• Life insurance. This type of life insurance covers the remaining amount of your loan in the event of your death.
• Credit involuntary unemployment. It covers some of your repayments if you’re laid off or become unemployed for a reason that’s not your fault.
• Credit family leave. This helps with your repayments if you need to stop working to take care of a newborn or sick family member. It’s also called credit leave of absence insurance.
• Credit property. This covers the property you use to secure a loan if the item is stolen or damaged. This insurance is common with financing offered by furniture or jewellery stores.
• 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.

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How much does loan or credit insurance cost?

When you get loan or credit insurance, you’ll either pay a recurring monthly premium 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 the following:

• 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 for short-term disability than you will for long-term critical illness.
• Demographic. How much you’ll pay can also depend on your age and health, with younger borrowers netting lower premiums.

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Am I eligible for loan or credit insurance?

You’ll usually need to meet the following criteria to be eligible for loan or credit insurance:

• Be between the ages of 18 and 70
• Have a loan that you need insurance for
• Fill out a short health questionnaire or pass a comprehensive medical exam

Where can I get legitimate loan or credit insurance in Canada?

You can apply for loan insurance from the following providers:

• Your lender. If your lender has issued you with a full loan, chances are the insurance they offer is above-board (unless they’re attempting to pressure you into buying it).
• Bank or credit union. Banks and credit unions are federally regulated, which makes them a trustworthy source of financial products, including loan insurance.
• Certified online provider. Online providers may be a good source for loan insurance, but make sure to look at customer reviews and check the company’s reputation.

How to spot a loan or credit insurance scam

Loan insurance scams are typically carried out online and can be very difficult to detect. They usually come in two different forms:

1. Phishing scams

These scams involve a provider collecting your personal information to sell it later. You won’t lose money but you’ll never receive your insurance and your privacy may be at risk.

2. Fraudulent payment scams

With these scams, your provider charges you upfront fees and then takes off with your money without issuing your loan insurance.

Loan insurance scam scenarios

Avoid the following scenarios since they may be an indication that you’re at risk of a loan or credit insurance scam:

• You’re asked to pay money upfront. It’s illegal for a lender to ask you to pay for loan insurance before you receive the full amount of your loan.
• The offer seems “too good to be true”. If a provider offers terms and rates well below the national average, chances are they’re running a scam.
• The loan insurance offer is unsolicited. If you’re contacted out of the blue with a loan insurance offer, it’s likely fraudulent (especially if it’s not from your lender).
• Your provider asks for an untraceable form of payment. Be suspicious if your lender asks you to send cash via Western Union or pay with a prepaid debit, credit or gift card.
• The insurance offer is on an unsecured website. Don’t put your information on a site that doesn’t start with https:// (with the “s” indicating that the site is secure).

What should I do if I get scammed?

If you’ve been scammed, you can report the situation to your bank, the police and the Canadian Anti-Fraud Centre. Supply as much information as you can about the fraud by providing documents, receipts, copies of emails and/or text messages.

If you’re a victim of identity fraud, you’ll want to freeze your accounts and report the fraud to the credit bureaus. You may be able to recover lost funds through your bank or credit card company or through criminal restitution if the fraudster is found and charged with a crime.

Which factors should I consider when comparing my options?

Consider the following factors when comparing your loan insurance options:

• Annual fees. Look at the premiums you’ll be charged and settle on 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’re in good health and fall within the age limits required for insurance coverage so that you don’t end up 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.
• Reputation. Find out if the insurance provider is legitimate by doing some online research, including looking at reviews and contacting the Better Business Bureau.

8 questions to ask before getting loan insurance

Ask yourself the following questions to figure out if loan or credit insurance is right for you:

1. Do I already have insurance? If you already have insurance through work or a personal plan, make sure you won’t be paying for overlapping coverage.
2. Am I getting the best price? Loan insurance doesn’t have to come directly from your lender. Get quotes from multiple providers to find the best deal.
3. Can I afford it? Credit insurance increases the cost of your loan, sometimes significantly. Make sure your monthly payments will still fit your budget.
4. How does the premium work? You’ll pay more in interest if your loan insurance premium is added to your loan amount. It’s better to get separate payments.
5. What does my insurance cover? Carefully read the fine print to make sure you understand what’s covered and what exemptions might apply.
6. Can I cancel my policy? Find out if you’re allowed to cancel your coverage before your loan term ends and if you’d qualify for a refund.
7. When does coverage go into effect? Some credit insurance policies require a waiting period, so your insurer might not pay out your benefit immediately if you file a claim.
8. Is my cosigner covered? If someone else is also signing your loan, ask if they’re covered and to what extent.

Credit insurance alternatives

Not sure whether credit insurance is right for you? Consider one of these options instead:

• Traditional insurance. Regular disability or life insurance is usually less expensive than loan insurance. It also might cover more situations, and you’ll never pay interest on it.
• Help from friends and family. Talk to your loved ones to come up with a plan for how to handle personal expenses, including loan repayments, should something happen to you.
• Emergency fund. Put funds aside in a high interest savings account to cover several months’ worth of bills if you have the disposable income to do so. Learn more about the best high interest savings accounts.

Bottom line

Loan insurance can be a useful tool to protect your financial stability in an emergency. It can help cover your loan payments if you can’t make them due to job loss, injury, illness or death. Just remember that loan insurance can be expensive, and you should make sure you compare offers and buy from a legitimate provider if you decide this option is the right fit for you.

Frequently asked questions

• How much will I pay to add insurance to my loan?

  What you'll pay can depend on a number of factors including where you live, how old you are, how much you borrow and what type of insurance you take out. The cost of loan insurance can range between 0.5% and 5% of the total value of your loan (although some providers might charge more).

• Should I get loan insurance if I already have life or disability insurance?

  You should see if your current insurance policy covers loan repayments after an injury or death. This will save you money in the long run since you'll avoid paying twice for the same coverage.

• Can I cancel my loan or credit insurance after I buy it?

  It depends on your provider. Most allow for a full refund within 10 days of buying a policy but some may only offer a partial refund, depending on when the insurance is cancelled.

• Is it possible to be turned down for loan insurance?

  Yes. You can get turned down if you're not eligible for coverage due to medical reasons or because of your age. Make sure to find out what the eligibility requirements are for the loan insurance you're interested in before you apply.

• Can my loan insurance claim be denied?

  Yes. You can be denied for several reasons, including your age or pre-existing health conditions. You may also be denied if you lied on any part of your application or provided incorrect details about your health status when applying.