Beware of mortgage insurance!

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, which we will discuss below. 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.

CBC Marketplace revealed the scam that is bank creditor insurance in its feature, “In Denial”  and described in detail how it works.

Ever had your doctor put a cuff on your arm to measure your blood pressure? Most of us have, but that’s considered a test for high blood pressure. When asked if we have had a test for high blood pressure, though, most of us will respond in the negative. Ladies, have you ever had a Pap test or a mammogram? Men, ever had a PSA test for the health of your prostate? Most likely, you have. Problem is, those are tests for cancer but most people will respond in the negative when asked if they have ever had one. When a claim is made, the banks will go back to those responses and match them against doctors’ records. For what purpose? To use those responses to deny claims. The CBC Marketplace feature said the banks do not reveal what percentage of claims they deny; makes you wonder why.

Because it is so patently unfair, many states in the U.S. have banned post-claim underwriting. Here in Canada just one province has made it mandatory that life insurance be sold by a licensed broker who will not only ensure underwriting takes place at the time of application, but also advise the client on how to respond to health questions, and that is Alberta. This was no easy feat. When the Alberta Insurance Council first tried to implement these regulations in 2001, the banks fought the province tooth and nail, right to the Supreme Court of Canada. It was not until 2007 that the Court ruled in Alberta’s favour, saying the province was within its rights to protect the consumer in this fashion.

The upshot is that it pays to purchase mortgage protection insurance from a licensed insurance professional who is duty bound to keep your best interests at heart. In the same way, it makes sense to apply for a mortgage through a licensed broker, such as Ms. Laurie Baird of Verico Mortgage in whose column this article appears.

A policy owned by a mortgagee (rather than a bank) will have guaranteed rates, a benefit that will remain constant, provide for a beneficiary of your choice, be based on the state of your health, be portable, and can never be cancelled (so long as you pay the premiums, of course!)

 

Article written by Chuck Duerden.

Chuck Duerden is a licenced insurance agent with Septen Financial. He may be reached at [email protected], 250.575.3798. Follow Chuck as Charles Duerden on Facebook, LinkedIn and Twitter.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.