A reader writes to us: “I am 62 years old, I am single and I run a small business on my own. My budget is limited, both business and personal. I own a condo with a mortgage balance of $ 140,000. I just renewed the mortgage, including the life and disability insurance offered by the bank. My whole family lives abroad. I wonder if it’s relevant for me to maintain this assurance. “
Let us first set the record straight. If there’s one topic that comes up automatically when negotiating a mortgage, it’s loan insurance. Can a creditor require you to take out insurance to cover the loan? Yes, it can be. But he can never oblige you to subscribe to it directly from the financing contract.
Many will choose for ease of signing the mortgage loan, sometimes under pressure (a subject that we will discuss in a future column), to retain this insurance offered by the creditor, since we will have explained to them that it is possible to cancel it. later. But ultimately, few of them will. Nobody gets up on Saturday morning with the urge to shop for insurance. The financial consequence is that many pay this way for more expensive life and disability insurance – in fact, an increase in your borrowing rate – and of lower quality.
Upcoming rate hike
The reality is that many households are financially vulnerable and live from paycheck to paycheck. The current rise in real estate market prices, and potentially that of interest rates, increases this vulnerability since the amounts allocated to housing are also increasing. Thus, for many, life and disability insurance will remain relevant as long as a mortgage remains to be repaid. How much do you contribute to the family budget? How would your death or a prolonged inability to earn income impact your spouse’s and / or children’s ability to maintain that home and your quality of life? These are important questions to ask, considering that the primary residence is an important part of their financial balance sheet.
Thus, young owners, who have a lot of expenses, often lower incomes than their elders and sometimes young children in their care, are exposed to more risks. In addition, people in their fifties or near the retirement horizon should also secure their assets. Of course, they have less expenses and have accumulated a lot of savings. On the other hand, by being on the eve of retirement, they are more at risk of becoming disabled or being diagnosed with a serious illness.
Take the case, for example, of a 54-year-old who would have to cash out only $ 25,000 from his RRSP to concentrate on his recovery. This withdrawal actually costs a lot more. Considering the taxes paid on disbursement and the waiver of tax-sheltered compound interest on that amount, it is more of a loss of $ 70,000 in the value of the RRSP account after 15 years. If, with life insurance, you protect your loved ones, disability insurance is the one from which you will benefit directly in the event of accident or illness.
The case of our reader
In the case of our reader, the relevance of life insurance will depend on his estate wishes. Since he does not have a spouse and dependent child, life insurance could be used to facilitate the succession. It makes the liquidity required by the liquidator easily accessible to repay the loan and then take the time to settle the estate without hassle. Unlike the insurance taken out via the loan directly, it is he who will choose his beneficiary, while currently, it is the creditor who will only reimburse the balance of the loan at the time of death.
In this situation, disability insurance is without hesitation the key element: 3% of mortgage foreclosures occur following death, while 48% are explained by disability. If he has few assets and generates little income, it is likely that the inability to generate income over a short to extended period would have a decisive impact on him. He must ask himself what the impacts would be if he did not
generated more income for an extended period, both on its ability to maintain its residence, a
important asset for his retirement, than, in this case, his ability to make his business profitable.
Validate the analysis of your needs
Our reader, in light of the points raised above, will have to validate the analysis of his life and disability insurance needs. With regard to disability insurance, the amount of protection required in this case may well exceed that of the monthly mortgage payment. However, taking out individual protection should be encouraged, to the detriment of the insurance included in the loan. He should know that after 60 years, there are fewer products on the market: personalized support with a financial security advisor who will guide him in his choice between those requiring pricing and those whose issuance is simplified or guaranteed. absolutely necessary.