This post come over a discussion I had with one of my friend. I was complaining about the fact that we have to offer (can’t mention the word “sell” 😉 ) a bunch of product to our clients while I really want to help them and only offer them solutions to their needs instead of becoming a car salesman 😉
I took the example of credit cards and insurance product. In regards to credit cards, if the person needs one, I’ll surely show him what we have. However, I feel kind of cheap asking my client if he wants a Master Card after he just signed a $500,000 investment transfer with me!
But today I’ll concentrate on the insurance product on credit. First of all, insurance should be purchase for only 3 reasons:
1- to cover an amount for financial dependants (spouse, kids, family members that you are taking care of).
2- to use it within an investment or tax strategy.
3- to play Santa Claus one last time after you passed away.
So we will all agree that if you take insurance related to a debt, it is only to satisfy #1. In order to cover your need, you have 2 options: buy a life insurance (term, universal, this debate will not be discussed here) or you buy a life insurance attached to your debt.
The thing is that if you are only looking to buy life insurance, you will pay a huge premium on the credit insurance compared to a regular life insurance. You can actually buy a term life insurance for 20 years (almost the life of your mortgage) for an amount 4 to 5 times bigger with the same premiums attached to credit insurance. Not bad huh?
On top of that, if you die after 10 years, your life insurance will write a full check as of your credit insurance will only pay the remaining balance of your debt (about 60 to 70% of the original amount of your mortgage).
So why the hell banks are offering this product?
Yeah…. Sorry for those who have a credit insurance on their mortgage, you are probably pretty pissed off by now 😉
However, there is good news! If you have a critical illness or disability insurance attached to the very same debt, you probably did a good deal. I said probably 😉 This is a case by case analysis.
The thing is that both critical illness and disability come in combo or trio with life insurance on debts. Therefore, in order to have a great deal on one or both type of insurance, you must get the life insurance first…
In regards to disability insurance, the major advantage is that it’s the only way you can get more than 70% of your income. In fact, if you have a good job, your employer insurance will probably cover for 70% of your income (watch out for the waiting period and conditions). By law (in Canada), you are not allowed to purchase a private disability insurance that will exceed 70% of your income as total amount insured for an individual.
However, the disability insurance based on your debt will compensate for your payment for a specific period. Therefore, it is not related to your income but to your payments 😉
In the end, I would strongly suggest that you check with your banker and insurance broker to compare different insurance alternatives. You might not have the best package right now 😉
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