What is line of credit insurance & is it worth getting?

Insurance bills can add up, but having the necessary insurance when you need it can save a lot of money and hardship. 

There are certain types of insurance that are absolutely necessary, such as home and car insurance. There are also several types of common insurance that are optional, such as travel insurance and life insurance. And then there are some lesser-known insurance products, like line of credit insurance. 

If credit insurance protection is new to you, or something you’ve been considering, read on for all the details you need to know before buying this type of coverage.  

What is credit line insurance? 

Credit line insurance, or line of credit insurance, is a type of insurance that will help pay the outstanding balance on a credit product, such as a home-equity line of credit account (HELOC), in the event of critical illness or death.

So, say someone has a line of credit and becomes too ill to work. Then their line of credit insurance could help pay off the outstanding credit balance owing. Or, in another scenario, say a person passes away before paying off all their outstanding credit. Credit line insurance would cover the outstanding balance so the person’s estate doesn’t have to worry about it.

Can you get insurance on a line of credit? 

Yes, you can. All the big banks offer different types of credit insurance, which covers things like lines of credit and other loans. Each company’s coverage is a little different in terms of what they cover and what they’re called, so it’s a good idea to look into your specific credit provider’s insurance options to help determine if it’s right for you.

For example, Scotiabank offers four types of coverage: 

• Critical illness coverage: Can pay the outstanding balance on a Scotiabank line of credit up to $150,000 per insured line of credit and $300,000 total across all lines of credit if the covered person is diagnosed with an illness such as cancer, heart attack, or stroke
• Life coverage: Can pay up to $500,000 for all insured lines of credit if the insured passes away
• Disability coverage: Can pay a monthly benefit of up to $3,000 per month for up to 24 months per claim and 48 months total lifetime
• Job loss coverage: Can pay a monthly benefit of up to $3,000 per month for up to six months per claim and 12 months total lifetime if an insured is terminated or permanently laid off

How does life insurance work on a line of credit? 

If you buy line of credit life insurance, you pay a monthly premium based on your age and balance on the line of credit. This coverage would cover the balance of credit, up to a certain amount (such as $500,000) in the event you pass away.

The reason someone might opt for line of credit life insurance is so that their outstanding lines of credit are taken care of in the event of death -- meaning their next of kin would not be responsible for paying off their outstanding credit balance (up to the covered amount).

How much does credit insurance cost? 

If you buy line of credit insurance, you’ll pay a monthly insurance premium. Premiums are calculated on the daily balance on the line of credit up to the approved insurance coverage amount. 

Using Scotiabank as an example once again, we’ll look at the premium an insured would pay, based on age, for every $1,000 of their balance. If the insured is between the ages of 18 and 30, they would pay $0.25 per month for single coverage for each $1,000 that’s covered. 

The prices increase as the insured person’s age increases. So, for example, those between the ages of 31 and 35 would pay $0.32 per $1,000 of coverage. And each age bracket increases slightly all the way up to the age of 74, where the premium would be $4.11 per $1,000.

Premium reductions might be offered if the insured has multiple insurance products with one company. 

Should I buy line of credit insurance?

Weigh your options, and consider all the products available to understand what’s best for you and your family’s situation. 

If you have life insurance, critical illness, and short or long-term disability insurance then arguably, you don’t need it.  Your employer may offer all of these coverages when you’re working for them. However, these coverages don’t carry when you leave your job. 

With life insurance, whatever your death benefit is, that’s what your beneficiary receives and they can use it however they want. Either paying off the line of credit, paying down the mortgage balance, reducing higher interest debts, or ensuring a well-funded children’s education program. 

Critical illness insurance is a one-time tax-free lump sum payment usually intended to normalize life after a life-altering event, not usually reserved for paying off a line of credit. 

Long-term or short-term disability helps with a steady stream of income in the event of an illness where you can’t work. 

Line of credit insurance may be a good, inexpensive solution over the short time that you have a line of credit you need, but with other coverage in place, you may already be safe from financial despair. Read your contracts carefully. 

The bottom line

As far as credit products are concerned, line of credit insurance is fairly affordable. However, it’s a very specialized product: It only covers your lines of credit in some events that prevent you from paying off the balance. Other, more flexible insurance products – like life insurance – might be better suited to your needs.

As with all insurance products, it’s best to speak to your insurance broker for advice. They’re experts on all insurance products, will get to know you and understand your needs, and offer advice on the best insurance products for your individual situation.

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