Understanding Loan Insurance in Canada

When the unexpected happens, which it often does with life’s curveballs, you may find yourself in a sticky financial situation. This is especially true when you have loans to repay and no incoming money to meet your responsibilities. 

To avoid this situation when emergencies pop up or life happens, you can take out loan insurance in Canada. For many, this is an invaluable insurance product, but it might be something you already have, depending on the kind of insurance you carry. 

In today’s article, we explore this insurance to detail what it is, its types, benefits, and disadvantages, as well as how much it could cost monthly. 

What is Loan Insurance? 

Loan insurance in Canada is also called creditor’s insurance. It is an optional form of insurance. Its purpose is to help you make payments on a loan or pay it off in the event of disability, death, or job loss. Although this payment protection is meant to protect you first and foremost, it also protects the people you love against the financial burden of your loan. 

Pros and Cons of Loan Insurance

Before we examine the types of loan insurance in Canada, it’s best to learn more about its benefits and drawbacks. Below, we share an insider look into it to help you determine if it truly provides borrower safety and is something you need. 

Pros 

1. Protects a co-signer or family member, like your spouse, from taking on your debt if you pass away or cannot work. 
2. You may be eligible for loan coverage if you become disabled or ill, which can help alleviate financial strain. 
3. When offered directly by lenders, loan insurance in Canada can provide quick approvals even without full medical underwriting. 
4. Your premiums can be added to your loan payments. This makes it easier to spread out the cost and manage payments. 
5. You can gain peace of mind when taking out larger loans, such as vehicle or home financing, and business funding. 

Cons

1. Loan insurance is optional and not required. It can also increase the cost of borrowing. 
2. There may be specific eligibility rules that prevent the loan insurance from paying out in cases of job loss or medical conditions. 
3. Depending on the type of insurance, you could face more limited loan coverage. 
4. As the loan balance is paid down, coverage often decreases even though your premiums could remain the same. 
5. When purchased through lenders instead of independent insurance providers, premiums can be much higher. 

Types of Coverage 

With the positives and negatives in mind, it’s time to explore some of the types of loan insurance in Canada. Take a look below, as you may already have insurance that includes loan coverage in certain situations. 

Credit Life Insurance

Credit life insurance pays the remaining balance on a loan if the borrower passes away. Usually, credit unions, banks, and some private lenders will offer this type of loan insurance. It is also optional and separate from life insurance. 

Credit Disability Insurance

Credit disability insurance provides coverage for specific disabilities that make an individual unable to work. Your approval and benefits for this loan insurance will depend on the medical criteria listed in your policy.  In most instances, you can add credit disability insurance to credit cards, personal loans, and personal or business lines of credit.

Credit Critical Illness Insurance

If you have credit critical illness insurance and suffer a serious illness like a stroke, cancer, or heart attack, this insurance pays some or all of your loan. However, you’ll only have coverage for conditions listed in the policy. Many find that this type of loan insurance helps alleviate the financial pressures associated with medical treatment. 

Job Loss Insurance

Job loss insurance usually includes a type of loan insurance, but coverage is temporary. If you lose your job due to no fault of your own, you’ll have benefits for a set number of months, including loan coverage. Unfortunately, if you quit your job or lose it because of a fault of your own, you won’t have access. 

Mortgage Default Insurance (CMHC, Sagen, Canada Guaranty)

If you buy a home in Canada and you default on your mortgage and have a small down payment, you can use your mortgage default insurance. Typically, you can obtain this type of insurance through Sagen, CMHC, and Canada Guaranty. 

Additionally, this type of insurance is a legal must in Canada when a loan’s down payment is less than 20 percent. You’ll see that the cost is added to your mortgage and paid off over time. 

Business Loan Insurance

If you take out a loan or a merchant cash advance for your business, it’s important to consider business loan insurance. This type of insurance helps owners repay business loans if they are unable to work due to illness, disability, or death. This loan coverage is highly beneficial, as it can help ensure your business doesn’t go into closure or asset liquidation during times of financial hardship. 

How Much Does Loan Insurance Cost? 

Payment protection is incredibly important when you commit to taking out and paying back a loan. Unfortunately, many people feel that loan insurance in Canada is unattainable due to its pricing. This is not necessarily the case. Loan insurance costs vary based on loan type and your risk, but it’s likely not as high as you might be thinking. 

For example, personal loan insurance can cost between $15 and $60 plus every month, based on your coverage and balance. On the other hand, mortgage default insurance, such as that provided by CMHC, can range between 2.8 percent and 4 percent of the mortgage amount. 

Additionally, credit card balance protection may incur a fee of between $0.90 and $1.20 per $100 of balance. Then, when it comes to business loan insurance, pricing can vary significantly because it’s based on factors such as age, health, term, and loan size. 

Ultimately, it’s essential to understand these costs beforehand and determine whether loan insurance is a good idea in your specific situation. 

How to Get Loan Insurance (Personal or Business Loans)

Loan insurance is essential for borrower safety, as you now know, but getting loan insurance can be a little complicated. Below, we’ve shared how to apply for loan insurance in Canada for personal or business loans to save you time: 

Step One: Check Eligibility

• You need to be between the ages of 18 and 70.
• You have to have been a Canadian resident and gotten the loan in Canada
• To be eligible for disability loan coverage, you must be actively working at least 20 to 25 hours a week or more. 
• You must be the co-borrower, borrower, or guarantor of the loan and in good standing with the lender. 

Step Two: Compare Loan Insurance Providers

• Since loan insurance in Canada is optional, it is essential to compare loan providers before making a decision. There are numerous loan insurance providers available for individuals and businesses. Depending on your needs, you’ll need to look at different companies.
• Compare pricing, waiting periods, and benefit limits. You should also compare exclusions between independent insurers and bank-offered coverage. 
• Compare policies to see which match your needs. For example, do you need personal income protection or business continuity protection? 

Step Three: Complete the Application 

• Apply for loan insurance in-branch, online, or by phone at your bank, credit union, or an independent lender. 
• Choose the type of coverage you need, such as business loan, life, critical illness, or disability protection, and ensure it offers loan protection.
• You’ll often need to complete a short health questionnaire, and you may also be required to undergo a medical examination. 

Step Four: Provide Necessary Information

• You’ll need to present your ID, proof of income, employment details, and loan information. 
• You’ll need financial statements or ownership documents if you’re a business applicant. 

Step Five: Consent and Start Coverage

• You must sign to give express consent. This is required of you according to Canadian insurance regulations. 
• Coverage will begin when loan funds are released. 

Key Takeaways

Hopefully, you now have a better understanding of loan insurance in Canada. You should have a better understanding of what this insurance is, how to apply, the different types, whether you may already have it, and its associated costs. With this in mind, you should have greater peace of mind when undertaking a business loan, such as a merchant cash advance. If this is something you’re considering you can learn more about Bizfunds’ offerings here.