Beware of Mortgage Insurance
Castanet contributing story January 19, 2015
Written by Chuck Duerden a licensed insurance agent with Stephen Financial
Congratulations! You have the house of your dreams since the vendor accepted your offer and the bank approved your mortgage. What a bank will typically offer you now is its own brand of mortgage protection insurance to protect your family should anything happen to you and pay off the debt it represents. The offer will sound good, especially as there is no medical testing or reporting to be done, but caveat emptor! Be careful you don’t fall victim to one of this country’s worst financial scams: creditor group insurance.
The devil, they say, is always in the details, and creditor insurance has enough of them to ensure that you, the mortgagee, has the dice loaded against you and in the favour of the bank throughout the term of the policy. Why? Because creditor insurance is sold under a group plan by an insurance company to the bank, and so is tailored to the bank’s needs, not yours.
The gross unfairness of this type of insurance was exposed by CBC TV’s Marketplace. As an aside, it might be interesting to learn that should you die while carrying a mortgage the bank will actually charge you a penalty for breaking the agreement! The penalty is added to the mortgage that is paid off by the bank’s insurance. This is just one example how the mortgagee has more control over their affairs when insurance to protect a mortgage is provided by a licensed agent.
Here’s a handy list of eight (yes, eight!) reasons why you should never take the bank’s creditor insurance, one of the most lucrative products offered by the banks and the worst deal available for mortgagees.
FIRST REASON. Creditor insurance is declining balance insurance. That is, you will pay the same premium every month, even though any payout will be reduced to match the amount owing on your mortgage. Every mortgage payment reduces your balance, but your coverage will decline accordingly. Sounds unfair? It gets worse; read on!
SECOND REASON. Should you pass away, it’s not your loved ones who will be the beneficiaries. No, siree, it’s the bank! Under the terms of creditor group insurance, you do not have a choice as to whom the payout will go. All rights to designate a beneficiary other than the bank and for any purpose other than paying off a mortgage are lost once you sign up for this money-making scheme of the banks.
THIRD REASON. Your insurance rates are by no means fixed; they could go up at any time. Why? Because creditor group insurance is just that. It’s based on the perceived risk of the group to which you, as the mortgagee, have been assigned by the backing insurance company. If the experience of the group as a whole looks less positive than before, your rates will go up. This is so the bank can protect itself against loss.
FOURTH REASON. Even if you don’t smoke you’ll still pay the same rates as a smoker, which will be higher, of course. Creditor group insurance only considers your age and will not give you a preferred rate based on your actual health history. If you take the bank’s insurance you will pay the same the same as someone who smokes and is in questionable health.
FIFTH REASON. If another bank offers you a better mortgage rate, and you decide to change lenders, then you will lose your insurance coverage. That’s because the bank is the owner of the policy who will cancel it the moment you switch! In such a case you will have to reapply for coverage, which will be more expensive because you will now be older, and even more so if your health has taken a turn for the worse.
SIXTH REASON. Your bank cannot give you professional advice on taking life insurance for yourself, and your family, since banks typically employ few licensed agents.
SEVENTH REASON. Think you’re covered for as long as the term of your mortgage? Then think again, because creditor insurance can be canceled at the bank’s discretion, and you would have no recourse whatsoever. Why would the bank do such a thing? This is because your insurance policy might not fit your bank’s purpose, or overall business model, at some time in the future. Your bank representative may protest long and hard that this would never happen, but the fine print on the agreement will say such a thing is entirely possible.
And the greatest reason of all…..
EIGHTH REASON. Your bank may pay no benefit at all should you pass away, because the bank does not conduct underwriting when a policy is written, but rather at the time of death. Incredible as it may sound, the bank will make no attempt at all to gauge the risk of insuring you at the time you decide to opt for their insurance package. This is in sharp contrast to purchasing a policy through a licensed broker whose company will conduct underwriting at the time of application before issuing you a policy.
