Too much debt and underinsured

Amount of debt held by Canadian households has rising last 30 years

By Peter Boys, CAFA The Money Coach

The ever-growing debt loads now carried by the average Canadian family is becoming a big concern for the Bank of Canada and financial advisors. Shakespeare wrote, “Neither a borrower nor a lender be.” Well, that may have been reasonable advice back in Hamlet’s day, but it’s hard to imagine a modern economy like ours functioning under this dictum.

For most Canadians, debt is a fact of life, at least at some point. Borrowing can help someone get a higher education, buy a new car, or purchase a home. Simply put, debt is a tool that allows people to smooth out their spending throughout their life.

The amount of debt held by Canadian households has been rising for about 30 years. Not just in absolute terms, but also relative to the size of the economy. At the end of last year, Canadian households owed just over $2 trillion, with mortgages making up almost three-quarters of all this debt.

While debt is indispensable for our modern way of life, it’s been a growing concern for the Bank of Canada for several years now. High debt levels make us more vulnerable to negative events, both as individuals as well our entire economy.

There are two ways to look at this. Traditionally, our focus has been on the vulnerability of Canada’s financial system arising from elevated indebtedness. This means analyzing how our banks would manage a serious economic recession with high unemployment and increasing debt defaults. But the Bank is also focused on the vulnerability of our economy to rising interest rates, given high household debt. There is little doubt that the economy is more sensitive to higher interest rates today than it was in the past, and that global and domestic interest rates are on the rise.

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This leads to the related issue of many Canadians not having resources such as savings and proper insurance coverage should something bad happen to them. For younger Canadian families there is a growing need to have adequate income replacement and life insurance coverage.

I cannot stress the importance of having some level of critical illness and disability coverage on the breadwinners of a household. With high debt levels and limited savings, many families would be very quickly cash-strapped even if just one of the working parents were to be laid up from a critical illness or disability.

The best time to buy all these coverages is when one is young and healthy. There are now policies that cover combinations of different coverages at affordable prices. We often get calls from people who have had a friend or family member stricken with a serious injury or illness and unable to work. Even $25,000 of critical illness coverage will make the mortgage payments for a reasonable time. Plus, $2,500 of tax-free disability coverage a month goes a long way to protect your hard-won savings.

Please sit down with a trusted financial advisor and review what is available out there to fit you and your family’s individual needs.

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