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.