At some point in our lives, we will take on debts to realize our dreams.
Whether it is for the purchase of a house, renovate, buy a new car, or to finance an education, debts would be an essential part of our lives and could accumulate over time.
When you take out loans, your bank will most likely offer to insure them for you.
What is insurance for loans or debts for?
This is an excellent question and one of huge importance, particularly if you have a family and don’t want to burden them with debts if you should suddenly die.
We present below the reasons why you should not insure your debts with a bank and what is the best solution that is most advantageous to you for the security of your family!
The question that is uppermost in your mind- What good is loan or debt insurance?
Why would you want to insure a liability? That is actually a very good question.
As the word debt implies, you owe money to a financial institution that you borrowed in order to undertake a project (purchase a house, car, finance studies, etc.).
If you should die, will the bank just forget about the loan and the money you owe?
The answer is, quite naturally, NO! The bank will not forget about it.
In the event that you die prematurely, the bank will use your legacy to pay off the debt or demand for your heirs to honor the loan and continue with the payments. In certain cases, the bank could seize your assets and sell them off to pay for the loan.
In short, it is complicated, and it could become a big problem for your loved ones.
To avoid such a situation, many people take out insurance for their debts in case they die.
They take out insurance that covers the amount of the loan, and if they die prematurely, the insurance policy will take care of their remaining debts.
It is an excellent fiscal strategy but you must choose the right type of insurance for it to work.
Indeed, banks can offer you insurance products to cover your debts but know that this option will not be to your best advantage.
If you want to know why, read on and we will explain it thoroughly.
Is there a simple, easy, economical, and effective solution?
The answer is YES!
Banks offer several types of insurance. Are they advantageous and favorable? No.
In fact, banks are not insurance companies. They don’t invest as much time in assessing their clients as regular insurance companies do. This means they charge the same rates for all and higher premiums in order to be profitable. In other words, they often charge too much. But that is not all!
Insurance from banks: decreasing coverage and more expensive premiums!
Debt insurance offered by banks generally decrease in the amount of coverage simultaneous with your decreasing loan balance. The price, meanwhile, remains the same. So as you pay down your loan and your debt decreases in value, so does the amount of your insurance. Obviously, the products of banks vary, but we will show you a far better option that has been proven to work and is recommended by financial advisors in Quebec.
To insure your debts, such as your mortgage, auto loan, student loans, etc., professional financial advisors in Quebec recommend a much better product: life insurance!
Life insurance is a flexible product with a number of advantages.
First of all, life insurance is not connected to a bank but rather to an insurance company.
You also need only one life insurance with an insurance amount that could cover all of your loans. You can also decide if you want decreasing coverage or a permanent coverage.
Usually, life insurance is a constant coverage (it remains the same for the entire insurance term) at a price that is lower than insurance products offered by banks.
Why? Their process of selection and categorization of their clients is comprehensive and efficient and this keeps their premiums lower.
To make it simple, with life insurance, if you die, it is your family that will receive the amount of your insurance and they can repay your debts with the money received.
On the other hand, bank insurance automatically applies the insurance amount to the loan, leaving your heirs with no choice.
It may seem complicated but it is rather simple.
To show the difference between constant life insurance and decreasing bank insurance, below is an example that will allow you to see the financial impact of your choice.
Example: Life Insurance VS Conventional bank insurance
You currently have a mortgage of $225,000, an auto loan for $15,000 and various other loans totalling $5,000.
Here are two options available to you.
You take out life insurance for the amount of $245,000. If you die today, your insurer will remit the amount of $245,000 to your heirs who will then pay for your debts.
If you die after 10 years, the balance of your debt is $180,000 and you have not changed your insurance, your heirs receive $245,000, pay off $180,000 and share the remaining $65,000 which can be used for any purpose. This is what constant coverage provides.
You take out insurance for your debts for the amount of $245,000. If you die today, your bank will receive $245,000 as payment for your debts.
If you die in 10 years, your loan balance is $180,000 and your insurance has decreased. The bank will receive $180,000 as payment for your debts. Your heirs will receive nothing.
Moral lesson: Life insurance is more advantageous and aims to protect your family by covering your debts but can also be used to maximize your legacy.
As we are on the subject of insurance for debts, one of the most important insurance product you will need is mortgage insurance.
It is an insurance product that protects your mortgage as we explained earlier.
This is where you can really make the biggest mistake.
Banks offer mortgage insurance that decreases with your balance but it is rarely favorable.
Financial advisors in Quebec recommend taking out life insurance.
Life insurance is more economical, flexible, and offers the best coverage for the long term.
Do you currently have debts and a mortgage and wish to save on interest payments? That’s great because you are in the best place to do it!
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