If you think that you might be paying for mortgage life insurance offered to you by your bank, then this information is for you.
Every so often I come across a product that I’m sure to steer my clients away from virtually 100% of the time. Bank-offered mortgage life insurance is one of those products.
Mortgage life insurance (aka mortgage protection insurance or creditor insurance) is not to be confused with CMHC mortgage loan insurance, which adds an additional premium to your mortgage amount when your down payment is less than 20%.
In a nutshell, mortgage life insurance is offered by your bank when you sit down to sign mortgage documents.
It agrees to pay off all, or a portion of, the outstanding mortgage balance for covered person(s) should they be unable to pay their mortgage due to a covered illness or untimely death.
Sounds fine and dandy in theory, and the concept is actually a great idea… if done correctly.
My 3 biggest problems with this bank-offered product are:
- It’s typically overpriced compared to comparable products on the market
- The lender gets the payout, not the family
- You might be denied coverage when you need it most
1. Why Pay More For Less?
As your mortgage balance decreases, you’d think your insurance premiums would also decrease, at least to some degree. However, in most cases, your premiums will either remain the same or go up.
Why? Well, you’re required to either renew your policy when you renew your mortgage or apply for a new policy when you move. You’re older this time around, which means more “risk” to the lender of paying out for a claim.
Even if your premiums remain the same at renewal, how would you feel paying the same premium amount on a $350k mortgage balance as when your balance reaches $35k?
See the figure below for an example:
2. Lender Gets Paid, Family Does Not
As stated above, mortgage life insurance pays the lender, not the family of the borrower.
But what if the proceeds of your insurance payout aren’t needed or wanted for the purpose of paying off the current mortgage balance?
Can the mortgage payments possibly be covered without the help of an insurance payout?
Maybe your surviving family members would rather sell the home, pay off the outstanding mortgage balance, and relocate or downsize?
3. Your Claim May Be Denied.
Please read carefully because this, by far, is the biggest reason I advise against this product.
Some banks rid themselves of virtually all risk associated with paying out insurance claims as the result of two main factors:
- The application process
- The underwriting process
In most cases, the mortgage insurance application process is not overly beneficial for the borrower. In fact, it has been argued that the process is designed to maximize the number of policies sold while minimizing the number of claims paid out.
Some banks have designed this process so borrowers quickly read over lengthy, ambiguous health questionnaires, with little to no help from bank representatives.
Once “approved”, the lender adds the insurance premiums to the borrower’s mortgage payments and sends them on their way, with the assumption that they’re covered.
THE UNDERWRITING PROCESS
Here lies the reason many homeowners are at risk.
Many lending institutions that sell mortgage life insurance investigate their claims using a process called post-claim underwriting.
This type of underwriting is where the insurer waits until after an insurance claim is made to investigate whether or not the insured person(s) named in the policy was actually eligible for coverage in the first place.
So imagine, you apply for a policy as a responsible move to take care of your family, and you pay premiums on this policy for years. A tragic event renders you critically ill or takes your life, and your family receives notice that your insurance claim has been denied…
Your family has enough emotional and financial hardship to deal with so this is the last problem they should ever be faced with, wouldn’t you agree?
“But how is this possible when I’ve been paying premiums for all these years,” you ask?
The reality is, the initial approval for mortgage life insurance actually only qualifies you to begin paying premiums.
It’s not until the claim has been fully underwritten (after the fact) that you’ll discover whether or not you qualified for coverage.
The insurer scrutinizes medical records on the sick/diseased individual to see if there is even the slightest piece of information that contradicts what was stated on the initial application (remember, this was the application with lengthy, ambiguous health questions, with little to no help provided by bank staff at the time).
Of course, any contradiction is considered a fraudulent misrepresentation of the facts, in which case the claim would be denied.
The Solution – Traditional Life Insurance
There are numerous reasons why opting for traditional life insurance in this situation is a much more favourable route:
- Payout amount remains the same as long as you keep the policy
- Apply one time for the life of the mortgage loan (no need to requalify)
- Stays with you regardless of where (or if) you move
- Find out if you qualify for coverage in the beginning
- Consolidate other creditor insurance into one policy, often improving your monthly cashflow
As a licenced insurance broker, I take pride in the fact that I get to offer the following:
- Variety of choice, not tied to only one insurance provider
- Hold your hand during the application process
- Ongoing support if needed
- A fiduciary duty to you
- A broker who will build a policy that actually covers you!
If this brings to mind any questions or concerns, let’s talk.
I will provide you with a financial needs analysis – free of charge – to let you know exactly where you stand.
Whether or not you proceed with my recommendations is entirely up to you.
Simply reach out to me today so you can get back to life well-protected, and with added peace-of-mind.
At your service,
Jason F Cunningham