Loan insurance on personal loans in Canada: is creditor insurance worth it?

Loan insurance, often called creditor insurance or "payment protection", pays some or all of your loan if you die, become disabled, are diagnosed with a covered illness or, in some policies, lose your job. On a personal loan it is almost always optional: you can refuse it and still get the loan, and because it is optional it is left out of the APR. That is exactly why it deserves its own decision. At $25 a month, coverage on a 5-year loan costs $1,500, and claims can be refused for exclusions you never read. Banks are prohibited by the Bank Act from pressuring you into buying another product as a condition of the loan.

Part of personal loan mistakes and official sources. General information only; not insurance advice.

How creditor insurance works

The coverage types you may see:

• Life: pays the balance if you die.
• Disability: pays the monthly payment for a time if you cannot work due to illness or injury, after a waiting period.
• Critical illness: pays the balance on diagnosis of a listed condition.
• Job loss: pays payments for a limited time after involuntary job loss, with conditions.

What it costs: two illustrative examples

Monthly premium. A $12,000 loan over 5 years with insurance at $25 a month: 25 × 60 = $1,500. If the loan itself costs about $3,294 in interest at 9.99%, the insurance adds almost half as much again. Counting it, the yearly cost of the loan rises by several percentage points; see the worked numbers in comparing two offers.

Single premium added to the loan. Some lenders add a one-time premium to the balance. A $900 premium financed at 12% over 5 years adds about $20.02 a month and about $301 of interest on the premium itself, for a total of about $1,201.

Common exclusions and limits

Read the certificate or policy summary for:

• Pre-existing conditions: health problems you had before signing, sometimes looked back over a period, may be excluded for an initial period or permanently.
• Age limits: coverage may end at a certain age.
• Employment requirements: disability and job-loss coverage often require you to be working a minimum number of hours; self-employed or contract workers may not qualify.
• Waiting and benefit periods: disability may pay only after a waiting period and for a maximum number of months.
• Voluntary job loss: quitting or being fired for cause is usually not covered.
• Post-claim underwriting: if detailed health questions are reviewed only when you claim, a claim can be refused because of an answer given at signing.

Your rights

• You can refuse. Under the Bank Act, a bank may not impose undue pressure or coerce you into buying a product as a condition of getting a loan (coercive tied selling). Provincial law and insurance regulators address similar conduct by other lenders and insurers.
• It must be separate. Optional insurance is excluded from the cost of borrowing and APR, and its cost should be shown separately.
• You can usually cancel. Many creditor insurance products allow cancellation, with a full refund within a short initial period and a partial refund after. The period and refund method are in the certificate; ask for them before you buy.
• You can complain. Insurance disputes go first to the insurer and then to the relevant ombudservice or regulator. Lending conduct at a bank goes through the bank's complaint process and then OBSI; see complaints.

When it can make sense

• You have no other coverage and people who depend on your income.
• You cannot qualify for individual life or disability insurance for health reasons, and the creditor policy does not exclude your condition.
• The cost is small relative to the loan and you have read the exclusions.

When it often does not

• You already have group insurance through work or an individual policy that would cover the debt.
• The loan is small or short and you have savings that could cover it.
• The exclusions mean your most likely claim would be refused.
• The insurance was pre-selected and nobody explained it, a pattern more common with high-cost lenders.

Questions to ask before you buy

1. What exactly is covered, and for how long?
2. What are the exclusions and the waiting period?
3. Are health questions reviewed now or only when I claim?
4. What is the total cost over the loan, and is it added to the balance?
5. How do I cancel, and what refund do I get?
6. What happens to the coverage if I refinance or prepay the loan?

Record the answers on the offer checklist.

Frequently asked questions

The lender said insurance is required. Is that true?

For an unsecured personal loan, insurance is usually optional. If a lender insists, ask it to say so in writing and explain why. At a bank, this may be coercive tied selling; complain through the bank and the FCAC.

Does the insurance count toward the 35% APR limit?

Certain insurance charges are excluded from "interest" under the Criminal Code if they meet its conditions. If insurance is in practice mandatory or unusually priced, get advice.

What happens to the premium if I pay the loan off early?

Coverage usually ends when the loan is repaid. Ask whether any unused premium is refunded, especially if a single premium was added to the balance.

Who regulates the insurance itself?

Insurance is regulated provincially, for example by the Financial Services Regulatory Authority of Ontario in Ontario and the Autorité des marchés financiers in Quebec. Your certificate names the insurer.

Sources

• Financial Consumer Agency of Canada — creditor insurance and tied selling
• Justice Laws Website — Bank Act consumer provisions; Financial Consumer Protection Framework Regulations s. 48
• OBSI — complaints about banks