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Saving Money and Managing Debt

Protecting your income: Trent and Trisha's story Add to ...

Trent and Trisha have two small children and a large mortgage. Trisha is taking time off work while the children are young, which means the family really needs Trent’s income to get by. The couple worries about how they would pay the mortgage if Trent ever lost his job, got sick, or was injured. Their mortgage payment is $1,500 a month right now.

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They don’t have a lot of savings, so they consider two other ways to protect themselves: 

  1. Buying mortgage insurance and disability insurance: They look at a plan offered by their bank that would cover their mortgage payment if Trent got sick, was injured, or died.
  2. Buying life and disability insurance on their own for Trent. They look at buying enough life insurance through a life insurance company to pay off the mortgage in full ($250,000). Then, they ask for a quote on enough disability insurance to pay $1,500 a month if Trent got sick or was injured.

This chart shows what they learned when they compared these two choices:

If they buy:It will pay this much a month if Trent is sick or hurt:It will pay this much if Trent dies:It will cost this much each month:Total cost over five years:
Mortgage life and disability insurance with the mortgage holder$1,500.00Whatever amount they owe on their mortgage; this amount will drop as they pay off the debt$86.49$5,189.40
Private life insurance for Trent$0$250,000.00$24.98$1,498.80
Private disability insurance for Trent$1,500.00$0$78.75$4,725.00

 

The mortgage holder’s offer turns out to be lowest when you add the two costs of private life and disability insurance together. But the life insurance they get on their own doesn't change as they pay back the mortgage. So the extra cost means they get some extra protection for their family.

One more option: no insurance

Trent and Trisha think both of these options are costly. Before they choose a plan, they look at what would happen if they went without any insurance. What if they just used their line of credit to pay their mortgage if something happened to Trent? They are already approved to borrow $25,000 at 4.75%.

As this chart shows, the cost of this choice depends on how long Trent is off work. Here’s what would happen if they paid back only the interest on their line of credit each month they borrowed:

Time that Trent is off work:How much principal they owe on the line of credit:How much interest they will have paid:
3 months$  4,500$     54
6 months$  9,000$   214
1 year$18,000$   855
18 months$27,000$1,924

 

With this option, if Trent is off work for more than a year, they could be in financial trouble. They would use up their line of credit, and the bank might not lend them more. In fact, the bank might even demand they pay back their loan. If they can't, they could lose their home. 

Trent and Trisha decide what to do: Once Trent and Trisha think about the risks of not insuring Trent’s income, they choose to get their own life and disability insurance. It costs a bit more than the mortgage insurance, but they like the extra protection they get because their coverage won’t drop as they pay off their mortgage.

Of course, any insurance costs more up front than the line of credit option. But if something ever happened to Trent, it would cover their mortgage fully. They decide the cost is worth the extra security. It won’t pay all their bills, but without this insurance, they don’t know how the family would be able to get by.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

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