Mortgage Life Insurance – Be Careful!

Simon Huften

Simon Huften is the President of Life Insurance Canada.com Inc.

Canadians should avoid bank mortgage life insurance and instead consider a term life insurance policy. You may think that life insurance is just life insurance, but in this case the differences in policies between what a bank offers vs what a professional life insurance broker offers are significant and can impact your ability to get a claim paid.

Mortgage life insurance offered through your banks has one very large benefit – it’s easy to get.  While you’re getting your mortgage, the bank offers you the insurance.  You go through a handful of questions and answer “Yes Yes Yes Yes Yes” quickly to all of them and you’ve got insurance. 30 seconds, and you have life insurance coverage.

But do you?  Actually have life insurance coverage? Maybe not.  

Post-Claim Underwriting – you were never really covered

One way that a life insurance claim can be denied is through a clause called ‘incontestibility’.  This basically means failure to disclose.  But! It’s not restricted to things you failed to disclose because you thought they were insignificant (the bank may disagree with your assessment and decide that it was significant).  Nor is it restricted to things you failed to disclose that were related to how you died. 

With a traditional life insurance policy like the ones offered here at Life Insurance Canada.com Inc., policies are underwritten before the policy is issued.  An underwriter reviews your medical history and if necessary, asks follow-up questions. The result is a policy that has less tendency to be challenged after death because someone has already looked at your medical data.

Bank mortgage life insurance however uses what is known as post-claim underwriting.  The bank accepts the answers to your questions and issues the policy.  Only after you die do they do a review.  If they find something that you answered ‘Yes’ to inadvertently that may contradict information found in say a doctors report that they order after your death, then they can (and perhaps will) deny your claim.  You, being dead at this point, don’t have a whole lot of room to argue.

Worse, if your beneficiaries do argue the point, they’re looking at no death benefit paid and likely lawyers being involved to even start protesting the bank’s decision.

And when the banks deny a claim like this, they’re effectively saying that you never actually had coverage because information was not disclosed during the application. You’ve been paying for coverage but never actually had the coverage.  

Are you confident that you are able to answer all the medical questions correctly and completely so that after your death it will withstand the underwriting review done by the bank?

Premiums

Easy application life insurance through the bank that they sell to countless Canadians should be priced inexpensively.  Except, it’s not.  In almost every case, term life insurance from a broker such as Life Insurance Canada.com is less expensive than what is offered through a bank for their mortgage life insurance.

No conversion option

Bank owned mortgage life insurance does not have a conversion option.  A typical term life insurance policy offered through Life Insurance Canada.com does have conversion.  

Why do you care?

The conversion option in term life insurance allows you to exchange your term policy for permanent life insurance without a medical exam.  This is extremely important if you become uninsurable, because it now allows you to lock in life insurance for life, without consideration to your uninsurability.  Bank mortgage life insurance doesn’t offer this option so if you become uninsurable, you’re still locked into the existing insurance.

You can read more about the conversion option in our article on renewable and convertible term.

Not portable

Bank mortgage life insurance increases your risk of not having life insurance in the future.

Bank mortgage life insurance is locked to your mortgage – it’s not portable across mortgage providers.  If you move mortgage companies, you’ll have to apply for new life insurance at the new mortgage provider – and subsequently take a new medical questionnaire.  We don’t know what your health will look like in the future, but if it declines unexpectedly you will be faced with the choice of staying at your existing bank and paying whatever mortgage rates they charge, or moving to a new provider and losing your life insurance.  No life insurance, just when you’ve found out that you’re uninsurable.

What happens with a term life insurance policy if you become uninsurable?  Well since it’s not tied to your mortgage, there’s no impact. You can go shop out mortgages and your life insurance coverage stays in place.  Further, as we noted above, you have the additional option of conversion so you can actually extend your coverage for life.

The cost stays the same, but your coverage goes down.

Bank mortgage life insurance has level premiums.  However as you pay down your mortgage, your life insurance coverage decreases.  

With term life insurance, both the premiums and the coverage are guaranteed level for the duration of the term selected (often 10,20 or 30 years).

And there’s more

In addition to the above drawbacks, bank mortgage life has a variety of additional conditions where they can deny claims.  These additional conditions are not found in traditional term life insurance policies.  This means that you could die prematurely and have your claim denied, where a term life insurance policy would have paid.

Bank mortgage life insurance has a variety of clauses where the company can cancel your policy unilaterally.  Term life insurance policies do not have these clauses.

You cannot name a beneficiary with bank mortgage life insurance.  With a term life insurance policy the choice is yours.

Proceeds from a death claim with bank mortgage life insurance must be used to pay off the mortgage.  With a term life insurance policy, the proceeds are paid to your beneficiary without any strings attached.  They can pay off the mortgage, or they can keep the life insurance policy and continue to make monthly mortgage payments.  The choice is entirely your beneficiary’s.

So why do banks continue to offer their mortgage life insurance policies to consumers?  Likely because consumers assume that the life insurance is the same as other readily available life insurance policies and don’t question it.  Now that you’ve read this far you’re educated and are aware that this is not the case.

You can always head to our online quoter to compare the cost of term life insurance or reach out to one of our life insurance specialists for some advice.