Credit Insurance: Are you Sure What You’re Getting?
June 28th, 2008 | by Editor |Mortgage insurance or credit insurance can seem pretty appealing, but consider these thoughts from Canadian Certified Financial Planners on these products
The Toronto Star recently published a horror story about one of the big three banks’ credit insurance coverage. In this case there was a contractual clause regarding terminal illness within 12 months of applying for coverage. With this rule, if a new policyholder carried a zero balance for 11 months, borrowed $120,000 in the 12th month, received a diagnosis of cancer in the 13th month and died within a year, their debt would be reduced by just $13,000. That’s far from the debt relief most of us would expect from credit insurance!
When considering mortgage insurance or credit insurance offered by the bank, it’s important to understand the concept of life insurance underwriting.
Bank mortgage insurance is easy to obtain. The mortgage officer asks you a few questions about your health and, if you’re reasonably healthy, signs you up. Contrast this to the intensive health questionnaire you must complete to obtain regular life insurance! What is the reason for the difference? Life insurance is underwritten at the time of application. The insurance company does a thorough investigation of your health and determines the risk of your dying using statistically developed mortality tables. That’s how they calculate how much you must pay in premiums.
The mortgage insurance offered by the bank is underwritten at the time of death. When the insured person dies, the bank examines your health records in more detail and decides whether or not to pay you. This process can take several months, during which time your survivors must continue to make mortgage payments. In the event that no payment is made, the insurance premiums you have paid will be returned to you. That’s cold comfort to anyone depending on their “mortgage insurance” to take care of the mortgage bills.
Here are six more reasons not to purchase the bank’s mortgage insurance:
1. Your payout declines as you pay down your mortgage, but your premiums don’t change until you renew your mortgage!
2. When your mortgage is paid off, your coverage terminates. If you need insurance for other purposes you will have to submit medical evidence of insurability. If your health has changed, you may be uninsurable.
3. The bank, not your family, is the beneficiary of your insurance policy.
4. You can’t take bank mortgage insurance with you. Every time you buy a new home, you have to negotiate new insurance terms … and premiums increase as you get older.
5. Retail sales tax applies. If you buy your mortgage insurance through the bank, you will have to pay an additional 8% in provincial sales tax.
6. Mortgage insurance may be sold by people with a limited knowledge of insurance options.
Before you buy credit or mortgage insurance from the bank, consider looking for a better, more dependable product at a reasonable price.
Related Article:
- Exploring critical illness insurance.