The amount of average Canadian household debt has been in the news many times the past couple of months.
While interest rates seem to be steady for the time being, logic dictates that they will have to increase. This will eventually be reflected in higher mortgage payments. In addition, many real estate experts have talked about a housing bubble. Whether the Canadian housing industry sees a market correction is debatable; however, it does raise the possibility of seeing home values decrease.
One only has to look at the housing market fiasco in the United States to know that too much debt (in that case mortgage debt as opposed to credit card debt) can be a bad thing.
The big question is: how much debt is too much?
Well, if you are one or two paycheques away from not being able to cover your financial obligations then you have too much debt! Consider how much money it would take to cover your bills (including your mortgage) for at least several months. Sudden illness does happen, and so does the loss of employment.
One issue that many people do not consider is that household debt is also passed on to the estate when a person passes away.
Household Debt and Term Life Insurance
How a person’s debt is passed on to the estate depends on whether or not that person had a will, and if so what the will stipulates. Suffice it to say that debt which is passed on to the estate must be dealt with by the inheritors of the estate, usually the spouse and/or children of the deceased.
Have you considered using a life insurance policy to cover the outstanding household debt? While this may not be immediately appealing (since one must pass away for the issue to be taken care of), it does mean that the surviving spouse (and/or children) will not have that debt passed onto them (which in some cases can be significant).
A term life insurance plan suits this situation best since it is the cheapest type of life insurance available. While permanent life insurance is used as a wealth management tool, it is more expensive than term life. In this particular situation, it is debt, and not wealth, that we are alleviating.