When your mortgage application has been approved, you will at some point be asked if you want mortgage insurance, and you can choose from an array of options that “cover” you in the event of illness, disability or death. Most of us have a natural instinct to insure against such events so we generally sign on the dotted line. Your mortgage advisor earns an additional commission and you feel safe in the knowledge that you have covered your bases if disaster strikes. Except that you really haven’t. Here’s why:
The big three insurers, who provide mortgage insurance to all of the Big Five banks, use a practice known as post-claim underwriting for these products. This means that your application is not actually reviewed until you file a claim, which significantly reduces the insurer’s underwriting expense. Good for the insurer but not so good for you, because you don’t find out if you’re actually covered until something bad happens and you ask for the money.
At that point, for example, if you had previously answered any of the application questions incorrectly, your claim could be denied – and this can happen more easily than you think. The questions are generic, broad and multi-dimensional, and since the vast majority of mortgage advisors are not licensed to sell insurance, we can’t clarify or answer any questions you may have. When you complete the form you are approved to pay the premium, but you are not approved for coverage the way you are with traditional life insurance. (By the way, if your claim is denied you do get your premium back, so at least there’s that.)
Not to pile on here but there are several other things I don’t like about mortgage insurance. For example, most policies are tied to both the property and the bank, so if you move or switch to a different lender, your policy cancels. Also, mortgage insurance is expensive. Getting the same coverage using traditional life insurance will save you money and give you increased flexibility.
Look, I’m not out to stick my finger in the eye of the big insurers or banks for the fun of it. If we even knew what percentage of the claims were actually paid out we might have more confidence in the product. (Alas, these stats are closely held.) My bottom line is that people paying for insurance should actually be getting it. C’mon guys, design a better product for my clients and I’ll sell it.
Great comments David. As a Financial Planner I’ve been telling my clients this for years. We always implement life insurance completely independant from the clients lender.
Here’s another scenario to consider – along the same lines you’ve mentioned above.
Let’s say you qualify properly for the mortgage insurance through the lender – i.e. you were healthy at the time of application – but then your health changes!
You find out you have something as simple as high blood pressure – or worse? Now the ONLY life insurance you have is with that lender, and on that property. As soon as you want to move homes or possibly even refinance, you loose that life insurance. Your rates are re-evaluated based on current age and current health. Now your stuck! You can’t even shop around for the best mortgage rates available at other lenders because moving means you loose the only life insurance coverage you have, and may not be able to qualify for it again elsewhere.
Same goes for the coverage you have through work! Any change in health means your stuck with the benefits you’ve signed up for at that time. Change jobs and you loose that life insurance altogether. Serious consequences!
Having your OWN traditional life insurance policy – separate from your lender or group benefits plan – is the best way to go. The most flexability and the lowest premium paid over the entire time you’ll need the coverage.
Good work David!
On My website http://www.rightinsurance.ca there is a great video from CBC….
In a nutshell, the reporters talk to family memebers who find out too late the Big Banks are not paying the insurance claims!! Why because the insurance is reviewed after a claim…not before! I have a complete list of problems and short falls of personal insurance vs. bank bought insurance!
The stories you hear about in the press about insurance companies not paying almost always are sold by people who are not trained to sell insurance or have little experience. If you own this type of insurance replace it ASAP!!
“In Denial” – report on
Mortgage Insurance is meant to offer peace of mind and to reassure you that your family will be able to stay in your home if anything should happen to you. In this CBC Marketplace video, you’ll see that the reality falls a little short of that. Video produced by CBC.
Great comments. One other point to make, in the case of life insurance, your premium is based on the original mortgage amount and any claims are paid directly to your lender. As you pay down your mortgage, so does the amount the insurance co is required to pay out the mortgage. So when a claim is paid, yes your mortgage is paid out but you are paying premiums for a higher amount. For example a mortgage is taken out for $300,000 that is life insured. Premiums are paid based on a policy of that value. If at the time of a claim, the mortgage balance is $200,000 and this is the amount that the insurance will pay to your lender but what about the additional $100,000 that you have been premiums? Nothing…The better alternative is traditional life insurance for the value of the mortgage. At the time of claim, you receive the full policy value, payoff the mortgage and the balance is in your pocket.
Here is a story I got from the National Post:
Jonathan Chevreau November 24, 2010 – 10:50 am
Read more: http://opinion.financialpost.com/2010/11/24/three-in-ten-dont-have-life-insurance/#ixzz16LtcM5N8
Three in ten Canadians lack life insurance, according to a TD Insurance poll released today. Not surprisingly, six in ten don’t have the more esoteric critical illness insurance.
Actually, it’s impressive that 70% DO have life insurance, considering there are so many single people who don’t really need it. Of the 31% who lack coverage, TD says 40% don’t think it’s necessary, 23% admit they “probably should” have it and 23% say they just can’t afford it. In addition, 33% worry they aren’t adequately protected by their insurance policies.
Very helpful article for me, David! Thank you!