Mortgage Life Insurance purchased through a lending institution is generally not a good product. You should consider purchasing an individually underwritten insurance policy sold through a licensed insurance broker
Ok – so we are going to slam the banks a little in this article. I know, many of you love the banks and will be upset that anyone could say anything negative about them. In this regard, we humbly apologize in advance. But this article is a must read if you are considering purchasing mortgage insurance. That being said, the conclusion of this article will be to purchase your mortgage insurance from a licensed insurance broker. So it’s not all bad.
What is the deal with purchasing mortgage insurance from the bank. For starters, with the lending institution policy, the contract is not portable from bank to bank. Why is this bad? Let’s say you take out a mortgage life insurance policy with Bank A today. 5 years from now, your mortgage comes up for renewal and you wish to switch to Bank B because they offer a more competitive mortgage rate, and perhaps a different type of mortgage than you had before. The resulting savings on the new mortgage are over $50000 over the amortization of the mortgage and you are motivated to move. And you have every right to do so.
However, in the past 5 years you have suffered a heart attack and are no longer eligible for mortgage life insurance. Now Bank B says they cannot offer you coverage (you are not insurable). Therefore, it is not in your best interest to move your mortgage because you can’t get the life insurance coverage. And Bank A’s insurance policy is not transferable to Bank B. So, now, you are now stuck with Bank A forever!!!! Kiss that 50 K goodbye and go beg Bank A for forgiveness!
With an individually underwritten policy, the insurance is not attached to the mortgage and is portable. You can move it from house to house, mortgage to mortgage and suffer no penalty. So in this instance, you can move over to Bank B and tell Bank A to take a flying leap! No hugging required! You get the picture.
Here’s another big difference. With the lending institution (bank) coverage, the bank is the beneficiary of the policy. With an individual policy, you get to name the beneficiary of your choice, like your spouse or children. Why is this important?
Well, suppose you are a parent of two young children. Now I have kids of my own and I’ve got to tell you, while I love them to death, they are expensive little things. According to recent interviews, the average cost of raising a child is approximately $250,000 to age 18! Ouch. And suppose they are in private school - it’s even steeper. So, if you die with a $400, 0000 mortgages and the bank is the beneficiary, the bank gets the mortgage proceeds and the mortgage is released. Yet, your surviving spouse will still have ongoing commitments for your children like school, hockey, ballet, etc. In order to fund these ongoing commitments, your spouse would have to re-finance the house with new mortgage and all the expenses that go along with that.
Would it not be better if the policy named your spouse as the beneficiary instead? In the event of your death, your spouse would receive the $400,000 directly. Your spouse could then turn to the bank and say…”Here fella’s – take $50,000 and don’t bug me for 2 years!”
Your spouse could use the remaining funds to pay for hockey, ballet, dance school, etc. In the interim, your spouse can properly mourn you and perhaps find a new mate with Tom Cruise type looks! The point is, your spouse has more flexible options.
Now I’m just getting warmed up in terms of bank insurance. The big difference between a bank product and a personally underwritten policy is the underwriting. The lending institutions contracts are underwritten at time of claim versus time of issue. What does this mean? Well, if you purchased coverage from a lending institution, there is very limited underwriting that is completed. The questionnaire has about 3 questions that are completed by you, typically in the presence of a bank employee who is not licensed to sell insurance. When you make a claim in the event of your death, disability, or critical illness, the bank insurance company then proceeds to start the underwriting at that point. So, when you need the coverage most, the insurance company is verifying your application to see if you misrepresented yourself. CBC Marketwatch did a program on this type of coverage and it was found that only 3 % of actual policy owners would be able to receive an insurance payment based on how they answered the questions. One of the questions was “Have you ever been tested for high blood pressure.” The answer, for anyone who has been cuffed by a physician for blood pressure, should be “Yes, I was tested for high blood pressure, but it was found to be normal.” Most people would be disqualified by answering “No” and ultimately would not receive insurance proceeds. The insurance institution would say that they had been fraudulent on their application.
The best way to have an insurance application underwritten is by a licensed and trained insurance agent. Yes, there are a few more questions on an individually underwritten application, and they may request a sample a sample of your blood, a letter of your physician, they may even do an ECG (Electo Cardiogram on your heart). But at the end of the day, the insurer will make a decision on you based on information received. In the event something does occur, the chance of receiving a payout increases enormously. In my 20 year career, all my claims have been paid!! There has never been a decline to pay out.
As well, licensed insurance brokers generally carry an Errors & Omissions policy. That means you can sue them if your claim is denied. While I am not thrilled at the prospect of being sued, I show my clients my E&O policy as evidence of my accountability to their insurance payout. Touch wood, no claims to date. And that’s a testament to my desire to properly underwrite each policy.
What is interesting is that all the horror stories about insurance claims really belong to some of the bank policies. Those are the stories where premiums are paid and claims do not get fulfilled. You might want to watch the CBC Marketwatch segment, so we’ve added the link below.
http://www.cbc.ca/marketplace/in_denial/
Told you we were just getting warmed up.
Ok –here’s another issue with bank or lending institution insurance. The coverage they offer you is based on a level premium, but a declining payout. For example, if you purchase insurance to cover a $400,000 mortgage, they would set a premium for you. If you pay down your mortgage to $300,000, the premium stays the same. Yet if you died, the payout would be $300,000. It doesn’t make any sense?
Wouldn’t it be better if the premium stayed level and the coverage stayed level? So, if you purchase $400,000 of coverage, you receive $400,000 of benefit? As well, let’s say 3 years later, you have reduced your balance to $200,000. With an individual policy, you can cut your coverage in half (from $400 K to $200 K) and cut your premiums in half. Isn’t that a better solution?
Here’s another issue with the bank coverage. Because it’s part of a group plan, the insurance institution can change the rates or add restrictive riders. Let’s say there are a number of claims and they have to raise the premiums. The banks pass the new premiums onto you and you have to pay it.
With an individually underwritten policy, the premiums are what we call “Non Cancelable.” It sounds like a negative expression, kind of like you can’t get out of the insurance policy once you are in the contract. But what non cancelable means is the insurance company can’t change the rates or add restrictive riders. You, however, can cancel coverage at any time. Isn’t that a better route to go?
There are other major reasons to consider working with an insurance advisor regarding your mortgage insurance protection. For instance there are just more products to choose from. The lending institutions are stuck with the limited suite of products offered by their bank. An insurance broker can bring offerings from over 40 different carriers with products that include life, disability, critical illness insurance, long term care, health and dental benefits, and much more. And if the insurance advisor is doing their job right, he or she is not married to any individual carrier. Their job is to make sure you get the best coverage available for you, and not satisfy some bank mandate of selling their own branded institutional insurance.
Considering that the number of one reason for mortgage foreclosure is due to disability and illness, wouldn’t it make more sense to look at more of the living benefit types of programs as opposed to just the traditional life insurance plans? Remember, the average age of claim for a critical illness policy is age 41 – and people are claiming within 2.5 years of purchasing the policies. On a personal note, I have delivered many more critical illness policy claims than life insurance claims – and typically my clients are sitting upright when they receive the payout. We will examine Critical illness and disability insurance in other articles.
And did we mention return of premium products. Yes – for many of you, we expect you to be alive at the end of your mortgage. Many insurance products include return of premium where you are refunded the full amount of any premiums you paid into the policy. With certain life insurance products, like universal life (UL), you can actually increase your wealth through tax sheltered growth of your investments held within an insurance policy. That’s a whole other article, but many of my clients are using UL as a wealth creation product that has tax free growth similar to RRSP’s, yet with none of the tax bite at withdrawal time. As you know, RRSP’s are fully taxable as earned income when you withdraw the proceeds. UL can accumulate monies and actually have the proceeds withdrawn through a line of credit tax free at retirement. I have clients who place hundreds of thousands of dollars into UL policies as they know the tax benefits of sheltered life insurance policies – it’s a wealth creation scheme.
Ok – enough said. Now, we have a call to action. If you do currently have an insurance policy though a lending institution or bank, please speak with your financial advisor to make sure it is in your best interests to own that policy. If you are healthy, you should consider replacing it with an individually underwritten life, disability, and critical illness policy. And if you stay healthy, you can get your premiums back.
Protect Your Home, Protect Your Family, Stay Healthy, and get your Premiums back.
For further information, contact John Klotz. You can reach John at john@northwoodfinancial.ca or call 416-783-PLAN (7526).
Insurance products offered through IPC Estate Services Inc.