Seven Reasons To Avoid Bank�s Mortgage Insurance

Rino Racanelli Back in February of 2012, I wrote an article for Canadian MoneySaver titled: “You Shouldn’t Be Caught Dead with a Bank’s Mortgage Insurance”. Lately, I’ve received several requests from readers to update the article, and with some downtime created by the COVID-19 pandemic, I was finally able to get around to it.

More commonly referred to as creditor insurance, bank mortgage insurance provides group creditor life, disability, and critical illness insurance to its borrowers.

What Is Creditor Insurance?

Creditor insurance is a group insurance policy sold by an insurance company to a lending institution. The lending institution, usually a bank, owns the policy and issues certificates to individual borrowers. Because the bank buys the master policy from the insurance company, the insurer structures and markets the product for the bank and not the borrower—the person who actually pays for the insurance.

Consumers are usually unaware how creditor insurance works. They simply purchase, believing that all insurance policies are created equal and the product will protect their family should something happen to them. Most people are too busy to review their coverage and they’ve probably never read what they purchased. If consumers read the fine print and compared it to a personal insurance plan, they’ll realize there’s a huge difference.

This article will focus on mortgage life insurance offered to customers after they are approved for a mortgage. After researching several of the bank’s mortgage insurance contracts, I came up with seven reasons why you should avoid this product.

Reason #1

Your insurance protection decreases every year, but your cost remains the same.

The amount of insurance protection available through a mortgage lender is limited to the outstanding mortgage balance of your mortgage loan. Your insurance protection decreases with each mortgage payment made, but the premium will remain the same.

Reason #2

The bank is the beneficiary of your policy, not your loved ones.

You can’t choose your own beneficiary for the insurance proceeds. Because the bank is lending you the money for your home, they automatically become the beneficiary of all proceeds under a creditor insurance group contract. Your beneficiary cannot use the insurance proceeds upon death to cover necessities other than the mortgage.

Reason #3

Non-smokers pay smoker rates.

Most mortgage insurance available through the bank only considers your age to determine the cost of insurance. There is no preferred pricing for women and individuals in excellent health. If you are in good health and don’t smoke, be prepared to pay the same insurance rates as someone who smokes cigarettes, uses other tobacco products, or smokes marijuana.

Reason #4

If you switch banks for a better mortgage rate, you lose your insurance policy.

Mortgage insurance contracts do not allow portability, which means you can’t take the insurance policy with you. If you change mortgage lenders, you will need to re-apply and qualify for new coverage with the cost based on your new age. Not only will you be paying more for your insurance coverage because of your increased age, but if your health has deteriorated you may not even qualify for coverage, leaving your family in a potentially vulnerable position. All the insurance premiums you paid the bank are gone forever with zero return to you or your loved ones.

Reason #5

Your bank may have the option to change your insurance premiums at any time.

With creditor insurance your premiums are paid on a group basis and depending on the bank you deal with, your rates can be increased if the experience of that group becomes unfavourable. Simply put, if the bank isn’t making enough money on the group insurance policy they may increase your payments.

Reason #6

You receive limited advice since many bank employees are not licensed insurance advisors.

Many service representatives with the banks who sell this product are not licensed insurance advisors and cannot offer expert advice regarding your family’s entire insurance needs.

Reason #7

Your bank can cancel your insurance policy at any time!

Most, if not all, creditor insurance is a one-way contract. Since the bank owns and holds the contract with the insurance company, they control every aspect of the plan. If at any time and for any reason the bank decides to remove this product from the shelf, then they have every right to do so. Your coverage is gone and the money you spent is lost and can never be recovered. Of course, the representative at the bank can tell you that they don’t think this would ever happen. But the contracts I have read are quite clear that this option is available to the bank.

These are the top seven reasons I found, but not exhaustive by any means.

Many home mortgage borrowers are aware of the pitfalls of creditor insurance and turn to personally-owned life insurance policies to cover their insurance needs.

A personally-owned insurance plan can offer you:

Insurance coverage that remains constant for the term you chose.
A beneficiary of your choice to use the death benefit any way they choose.
Guaranteed insurance rates for the term you choose.
Premiums based on gender and individual health status, which means you will pay less if you don’t smoke and are in good health.
A portable plan that you own and can take with you wherever you go.
Advice from a provincially regulated licensed insurance agent who must meet and adhere to continuing education requirements.
Cannot be cancelled if the insurer decides to discontinue the product.

Creditor insurance in Canada is big business for the bank’s insurance division and in my opinion continues to be a terrible deal for mortgage borrowers. It’s not surprising that in years past, there have been several enforcement actions and lawsuits against credit insurance providers for unfair and deceptive product and sales practices.

Rino Racanelli is an independent insurance advisor. email: racanelli@sympatico.ca