After 15 years in the business, I have lost count of how many times a client told me that it was “required” to purchase life insurance with their mortgage – which is not the case, it is optional. Just the other day, my client thought they had to spend $400 a month on creditor life insurance, and the bank didn’t even show them an option to purchase a mortgage without it. We decided that having the coverage wasn’t even necessary since she already had adequate coverage in place.
Creditor Insurance is OPTIONAL, and if your lender tells you otherwise – they are not providing you with accurate information.
You DO NOT need to take this insurance to be approved for a loan or activate your credit card. Still don’t believe me? Here is the proof, directly from the Government of Canada: (www.canada.ca/en/financial-consumer-agency/services/insurance/credit-loan.html#toc0)
What is Creditor Insurance?
Creditor Insurance is an optional insurance product that financial institutions can offer to help pay off credit or loans. Each lender may have different plans; however, they all offer Life Insurance that can cover a part or all of your debt in the event of a death. You may also be able to obtain Critical Illness or Disability protection as well. While I agree that such protection is important for many, I don’t necessarily agree that Creditor Insurance is a great solution. In fact, I don’t know of any financial advisor that will say they recommend someone to go with creditor insurance, unless they are working for the lender. Here’s an article that can prove that statement and will share some of the disadvantages to such products: (globalnews.ca/news/3488311/mortgage-life-insurance-canada).
Have you purchased, without knowing?
This is the troubling part . . . I have found that many clients didn’t even realize that they had or agreed to such coverage. For those who are not in the insurance industry, they may not realize the disadvantages of going with creditor insurance.
I believe that simplicity is a big reason why people purchase it. They know they want/need the coverage but didn’t take the time to research their options. When buying a home, it’s quick and easy to take the coverage, so they go ahead and do it.
It is important to note that banks are prevented to offer Individual Life Insurance through their branches, as it’s a breach of the Bank Act. This means that they are not able to help you explore all your options and creditor insurance is their solution to help someone get the coverage they need. If you need the coverage, it’s ok to take it with your mortgage and cancel it when you secure a better solution.
In my opinion, the best option is to work with a professional Insurance Broker that can help you invest your time to understand the options available to protect one of your largest assets. If you have purchased creditor insurance, you are doing a disservice to yourself by not comparing it to what else is out there.
What is the BIGGEST RISK with Creditor Insurance?
These are the types of policies that give the insurance industry a bad rap – that insurance companies do not pay out at the time of claim. Let’s further explore the reasons why . . .
Creditor insurance products typically only have a handful of “yes/no” questions. The client may automatically be disqualified for a claim if they accidentally answered a question incorrectly. Based on some of the questions, it’s fair that a consumer could have accidentally answered “no” simply because they didn’t understand the question. In addition, the mortgage broker or advisor selling the insurance is likely not qualified to provide advice. Not having someone that you can ask for their opinion, means that the answers you provided are your sole responsibility.
I don’t know about you, but I want to have peace of mind that the coverage I purchased will be there for my family if something were to happen. Unfortunately, I do not have much confidence when it comes to simplified applications, such as creditor insurance. What’s my biggest concern? It’s called post-claim underwriting. The insurance company will try to determine if you answered the questions correctly, at the time of claim.
Here is an example of one question on the Mortgage Protection Plan Application:
“During the past 3 years have you had or been treated for: mental or nervous disorder (depression, anxiety, stress, etc.), neurological disorder including seizures, high blood pressure, kidney or urinary disorder, gastrointestinal bleeding, back or knee pain, arthritis, other musculoskeletal disorder or any other illness, disease, operation, injury, or congenital defect not listed?” See the area in bold? ANY OTHER ILLNESS, no matter how insignificant it may have been, could become an issue at the time of claim.
Let’s expand on this a bit more… imagine someone experienced some migraines and didn’t think too much about it and didn’t disclose. Down the road, they had a stroke and passed away. At the time of the claim, they found out that the client had a history of migraines, yet they answered “no” to all of the questions where they should have in fact answered “yes”. Are they going to pay? Put it this way, I wouldn’t want to be the insured’s family.
Now, imagine if this client decided to purchase a fully underwritten policy instead of creditor insurance. The application itself would ask about migraines giving the client the opportunity to disclose and expand on their medical history. If the underwriter needed additional information, they would have asked the client’s doctor for further details to help ensure full disclosure. Depending on the severity of the migraines, there is a good chance that the history of migraines itself would not have had an impact to a fully underwritten policy and would have been issued standard. Can you see the difference? Individual Insurance policies have a significantly higher payout ratio compared to creditor insurance.
If you, or someone you know, has creditor insurance that was purchased with their mortgage or loan, please tell them to get a second opinion from an experienced broker. Not only does individual coverage offer a better contract, but typically it is also much more affordable. Hopefully this helps create a bit of awareness on the issue.
Still think Mortgage Life Insurance is a good idea? Here are a couple of good videos to watch to learn more: