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rob carrick

Rising interest rates aren't the only risk to you being able to carry your share of this country's mountain of household debt.

What happens to your debts if you die suddenly? This is no small question at a time when Canadians owe a combined $1.6-trillion and the ratio of debt to household income is hovering close to an all-time high. If you don't have an answer, then read on.

Let's begin with mortgages. Bankruptcy trustee Andy Fisher of Farber Financial Group says your mortgage debt is attached to your house, not to you or your spouse. "If somebody passes away and there are no funds to make payments on the mortgage, then the mortgage stays with the house," he said. "Somehow, through selling the house or refinancing, the mortgage has to be paid."

Mortgages are the ultimate sales tool for insurance, and the big banks know it. When setting up a mortgage, they practically pin customers to the wall to sell them what is commonly known as mortgage insurance. It's certainly convenient to say yes, and many people do. But term life insurance is the better choice for these reasons:

  • The payout on the bank’s insurance declines along with your mortgage balance, although premiums stay level; term life also has level premiums but the payout doesn’t change.
  • If you change banks, you will need to requalify for mortgage insurance and costs may rise.
  • Bank mortgage insurance is more expensive, although easier to qualify for in terms of medical questions and testing.
  • The beneficiary is the lender with mortgage insurance, whereas you can choose your own beneficiary with term life.

A Google search for term life insurance quotes in Canada will give you all you can handle in pricing information. You can also talk to an insurance agent to buy term life.

The outstanding balance on your mortgage is just one consideration in deciding how much of this coverage to buy. Another is your home equity line of credit balance. If it's standard operating procedure at your home to owe money on your credit line, add some extra coverage to your term life policy.

Less of a concern are balances owing on things like loans and credit card balances – they're the responsibility of the individual who incurred them, not his or her family. "Spouses don't marry each other's debts – each individual is responsible for his or her debt," Mr. Fisher said. "And as for kids, they don't inherit their parents' debt."

Mr. Fisher said debts like these would be paid out of assets you leave behind after you die, and that can mean less of an inheritance for your survivors. Excluded from this calculation are assets in registered retirement savings plans and tax-free savings accounts – they go directly to the beneficiaries you named for these accounts, with no obligation on their part to pay your debts. If there are no other assets, your survivors are not responsible for your debt.

Other considerations in deciding how much life insurance to buy:

  • covering funeral costs;
  • replacing your income for at least a few years;
  • creating an educational savings plan for your kids;
  • adding to your group life insurance coverage at work in case you change jobs or get downsized.

If you see yourself leaving a big estate that will cause tax issues after you die, consider a permanent insurance policy. You'll pay much more for this type of policy, but there can be an investment component and a cash surrender value if you bail out. For the rest of us, term life makes the most sense. You buy it for as long as you need it, and then you drop it.

Ten- and 20-year term life policies used to be common, but you can now go as long as 30 or 40 years. "If your objective is to cover your debts for a period of time or while your kids are small, you can probably get away with 10- or 20-year term," said Lorne Marr, a principal at LSM Insurance.

Developing a disability is a bigger risk than dying prematurely, which is why Mr. Marr sees disability coverage as being more important than life insurance. My own thinking is that life insurance comes first, because, while disabilities can be a temporary financial setback, there's no chance to repair the damage done to your family's finances when you die suddenly without insurance.

But Mr. Marr does make a good point in saying that being disabled could impair your ability to earn a living while also generating extra expenses. "Most people will do life insurance because it's less money and it's usually a little easier to qualify for. But disability is the more crucial need."

Globe app users click for a table showing a cost comparison of term life insurance.

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