Should I pay off debt first?

How it works

The practical test is not a rule about order. It is a comparison between the rate being paid and what the same capital would otherwise do, together with whether a premium commitment still survives once the debt payment is sitting beside it.

The cost or the catch

one payment doing three jobs

Where a permanent premium goes

1. Part meets the cost of the insurance itself
2. Part covers the insurer's expense and the premium tax
3. Part builds the contractual value of the policy
4. The split is not itemised on an illustration
5. A level premium is fixed for the life of the contract

A household still revolving balances at consumer rates rarely has the durable surplus that a commitment measured in decades needs. Starting anyway and stopping in year three costs more than either decision would have cost on its own.

How to run the calculation yourself

Writing the rate paid on each debt beside what the same capital would do in the alternative use under consideration turns the comparison into something concrete rather than approximate. A debt whose rate clearly exceeds what the alternative use would produce is usually the one to pay down first, without needing to decide the question any other way.

Redoing this calculation whenever a rate changes materially, rather than once at the outset, keeps the decision aligned with the household's actual situation. Whichever way the comparison falls, understanding how the eventual death benefit is actually paid out, covered in how is the money actually paid out, helps frame what the coverage is worth keeping.

Who runs this comparison, and who checks it

a licence is provincial, and so is advice

Where this practice is not licensed

1. 01No advice is offered to residents of those places
2. 02The explanatory pages remain open to anyone reading
3. 03A licence is provincial, and so is permission to advise
4. 04Checking a licence is a public register search

The household is the one who actually runs this comparison, because only the household holds both figures at once: the rate charged on each debt and the return available from the alternative use of the same money. The practical order is to list every debt with its current rate, write beside it what the same monthly amount would do elsewhere, then check whether a premium of that size still survives an ordinary month once the debt payment sits beside it.

An accountant can check the arithmetic once it exists and confirm whether interest on a particular debt is deductible, which changes its true cost. Where a contract is already in force, the insurer can confirm the guaranteed column in writing, and that figure, never an illustrated one, is what belongs in the comparison rather than a number remembered from a meeting.

What changes the answer from one household to the next

The rate on a debt varies by lender, by whether it is fixed or variable, and by the year it was opened, so a figure written down two years ago needs to be checked again before it is trusted. A variable rate can move the whole comparison within a single renewal in a way a fixed rate cannot.

The contract side varies as well. Two insurers wording similar coverage differently can leave a household with different guaranteed figures for what looks like a comparable premium, and the province of residence can change how a contract is treated if a household later faces a creditor, since provincial rules on the point are not identical from province to province.

What to ask, and of whom

the commonest reasons it fails

Who this method does not suit

1. 01A household whose income cannot carry an ordinary decade
2. 02Anyone who may need the capital in the first several years
3. 03Anyone who will not repay what they draw
4. 04Anyone who does not actually want permanent coverage
5. 05Anyone who cannot say what the contract is for

A lender can state, in writing, the current effective rate on each debt and whether a penalty applies to paying it down faster. An insurer can state, in writing, the guaranteed values of a contract already in force, separate from anything illustrated. Neither figure should be estimated from memory when the comparison decides something a household will live with for years.

A household unsure whether its debt is already unmanageable should ask a licensed insolvency trustee or a credit counsellor before it asks anything else, since that question sits outside what any comparison of rates can answer and outside what this page is positioned to judge.

Who this weighs on most, and who it barely touches

The comparison matters most to a household carrying revolving consumer debt at a high rate alongside a thin cash buffer, because for that household the certain cost of the debt is doing more damage every month than an uncertain contract can plausibly offset, and the two draw on the same dollars.

It matters least to a household with only a long amortized mortgage at a modest fixed rate and a durable surplus above its ordinary expenses, since that household is weighing two reasonable uses of money it can already afford to commit either way, rather than choosing between two urgent needs.

What this page will not decide

four conditions and a purpose

Who this method suits

1. 01Households with durable surplus income, not one good year
2. 02People who already think about money in decades
3. 03People who want the permanent coverage in its own right
4. 04Owners and incorporated professionals with uneven income
5. 05Families arranging capital across more than one generation

This page does not tell a household whether it is already carrying more debt than its income can service, and it does not calculate a specific rate of return, because that arithmetic depends on figures only the household's own lender, insurer and accountant hold on any given day.

The writer of this page is compensated by commission from the insurer on any contract placed, a fact worth weighing alongside anything else read here, and a household weighing debt against a contract is better served asking its own accountant and its own lender before asking an advisor who is paid only if the contract goes ahead.

The plain bad news

Committing new dollars to a level premium while a household is still carrying expensive debt does not make the debt cheaper; it simply adds a second fixed obligation beside one that is already straining the budget, and a household that stretches to fund both can end up missing a payment on whichever one feels less urgent that month. A premium is not as flexible as a minimum debt payment in the way many people assume, and asking an insurer for relief mid contract is a request, not a right written into the wording.

Ending a young contract early to redirect the money toward debt is its own cost, since the early cash value is lower than the premiums paid into it, and a household that starts a contract before this comparison is settled and then surrenders it within a few years typically recovers less than it contributed, on top of whatever the debt already cost while the contract was running.

None of this means the comparison always favours the debt. It means a household should run the comparison honestly, including the honest possibility that the answer is unfavourable to starting a contract at all this year, rather than assuming a contract is compatible with any level of existing debt.

How often to redo this, and what should trigger it

The comparison is not a one time exercise. A mortgage renewal, a rate change on a variable line of credit, a new debt taken on, or a bonus large enough to matter are all events worth redoing the comparison over, since any one of them can move the answer without the household necessarily noticing right away. A household that ran the comparison once at the start of a contract and never again is relying on numbers that may no longer describe its actual situation.

Keeping the debt statements, the premium receipt and a short note of the date the comparison was last run together in one place, rather than scattered across different files, is what makes redoing the comparison quick rather than a chore that keeps getting postponed. A comparison that takes twenty minutes because the numbers are already gathered gets redone; one that requires reassembling everything from scratch usually does not.