[Ray of Financial Highway is the author of today’s guest post. He is a financial industry insider who has worked as a mutual fund and life insurance sales representative and is currently working towards getting a Certified Financial Planner designation.]

I have pointed out many times that insurance is an important part of your financial plan; it is there to protect you and your family should the unexpected happen. However, many families, unfortunately, have found out that it does not always work that way. The issue here is Mortgage Insurance sold by banks and mortgage brokers. Ellen Roseman recently wrote in The Toronto Star about the experience of the Feldman family, who have been paying premiums for years but their claim was initially denied. The Feldmans did get their claim paid out on “compassionate grounds” after The Star got involved, but many families have not been so lucky.

Working in the insurance industry, I have seen too many families being unaware of the dangers of mortgage insurance. Insurance is a complicated topic and the mortgage professionals who sell these products are usually not trained or licensed to sell life insurance. I strongly recommend that you do your homework and deny any insurance offered by your mortgage lender.

In this post, I will point out some of the differences between the insurance you purchase with your mortgage and one purchased from an insurance company.

Post Claim Underwriting

The biggest issue with insurance from the bank is that they have post claim underwriting, which basically means that the underwriting will be done after a claim has been submitted. Technically you could be declared uninsurable after you have submitted a claim and your claim denied as happened to the Feldmans. If you purchase it directly from your insurance agent, all underwriting will be done before the policy is issued. Therefore you know your claim will be paid out when needed according to the terms of your contract, unless fraud can be proven.

Other issues with Mortgage Insurance

  1. Beneficiary is the lender. With life insurance, you select the beneficiary.
  2. Insurance amount decreases with your mortgage, but premiums stay the same. With life insurance, your coverage and premiums remain the same.
  3. Not transferable to new lender.
  4. Payout can be used only to pay the mortgage.
  5. Cannot change policy if situation changes. Policy can be modified as needed.

If you need insurance to protect your family, speak to a qualified insurance advisor to determine the appropriate insurance coverage for your family. Many opt for Mortgage Insurance tempted by the very low premiums but these low premiums come at a huge risk and a few extra dollars saved today could cause your family great pain in the future.

You may also want to check out a story that CBC Marketplace ran on this topic titled In Denial about a year back.

This article has 39 comments

  1. Good post – Mr. Cheap wrote about this as well recently and I commented that I think this type of insurance should be illegal – it’s just not fair to the consumer.

    I don’t think #2 is always true – when I first got a mortgage with TD (about 9 years ago), the insurance they offered was based on the mortgage size (ie 20 cents per $1,000 of mortgage). It wasn’t a very good deal though – term insurance was much cheaper.

  2. One of the challenges for first-time homebuyers is that they often don’t think about insurance until the last minute, and then they don’t have time to do the research. This was my case, in fact. I have basic life insurance through my employer, but there’s a huge income disparity between me and my common-law wife. If I die before our mortgage is paid off, there is no way she’d be able to meet even our minimum monthly payments and she’d lose the house. Mortgage insurance was offered and I took it because I didn’t have time to research the options or see if I could increase my coverage through my employer. In retrospect it was a stupid thing to do, and it’s costing me about $200/month.

  3. @fourpillars Some provinces have made it illegal, I believe in Alberta postclaim underwriting is not allowed.

    brad: $200/mth on mortgage insurance? that sounds very high to me, unless you have a huge mortgage and around 50 in age $200 is extremely high premium. I highly suggest you do some shopping and buy a term policy

  4. Let’s distinguish between creditor insurance and personal insurance. The key difference lies in who benefits.

    Creditor insurance protects the lender. You’ll find it for mortgage loans and credit card balances (another type of loan). The lender wants to be immunized from risks such as your death or disability. That’s understandable. But why do they charge you retail prices on coverage they can get at cost? While protecting the lender, you’re also making them more money. And if the claim doesn’t get paid, you’ll still liable. Is that win/win?

    Personal insurance protects the beneficiaries you choose. You probably need coverage in excess of your loan. You want to make sure the proceeds get paid. So you must get underwritten at the time you apply for coverage (and be truthful in your answers). This allows the insurer to assess a fair price (e.g., smokers, males, older people pay more). If you are not insurable, you know from the beginning. This eliminates the shock of having a claim denied later.

  5. Brad – why don’t you cancel the mortgage insurance? That’s what I did – I only had it for a month or two.

  6. I’m getting mortgage insurance for the first couple months in my new house. I move in in a month and won’t have enough time to get my life insurance set up.

    But as soon as the life insurance is in place, the mortgage insurance will be cancelled.

  7. Another problem that was not mentionned in the article is that if you suddently become uninsurable after you signed up a mortgage insurance with your lender, you are stuck with that lender. If you’d want to switch banks for example, you’ll be unable to get insured again.

    I personnaly got a mortage insurance from an insurance company. On the first event of my death or my girlfriend, the mortage balance will be paid to the survivor. Hum what if we die at the ‘same time’? I guess I should check this one out.

    The price I got was 50% below the same insurance my lender offered. Since we have no kids yet and no other debt except the mortage, we calculated any of us could afford living in the paid house, so we’re covered OK.

    • Canadian Capitalist

      @brad: Like 4P points out why don’t you think about canceling your mortgage insurance after shopping around and obtaining life insurance? You may want to wait to cancel until your life insurance comes through but isn’t that an option for you, especially if it is costing you quite a bit every month?

  8. Interesting article. Although I’m mortgage free, I do have the same life insurance policy on my home equity line of credit. I think I’ll go cancel the life insurance on it ASAP, since I only use it for leveraged investing anyways.

  9. Thanks for the suggestions – I will definitely look into life insurance and cancel the mortgage insurance!

  10. Dave in Kanata

    Who says free advice ain’t worth anything?! brad, methinks you owe 4P and CC a brewski 🙂

  11. Thank you, excellent post! I got free mortgage insurance for 6 months, enough time to set up my life insurance. This post kinda lit the fire under my seat to do this faster.

  12. How the hell is post-claim underwriting legal in this country? There is not a single person (who isn’t personally profiting from it) who could argue it is fair or remotely serves the needs of consumers. It’s a like little joke, “ha ha, looks like you weren’t insured after all! Now you’re screwed!”

  13. Hey Ray, good post. Good luck on the CFP (I passed exam in November and have my CFP designation now).

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  23. The Dark Side of Mortgage Insurance-

    This should be illegal, but don’t forget, insurance companies are paying hight taxes so the goverment doesn’t really care about you and me, all they care about the taxes.

    Everything you should know about Life Insurance: http://www.thefinancialpower.com/category/life-insurance/

  24. Post Claim underwriting should be illegal everywhere!

    The reason post claim underwriting isn’t illegal is that not enough people are acually affected by it. The thing is that very very few term life or mortgage life insurance policies actually result in a claim. Chances are you will outlive the policy. That is why they are so inexpensive in the first place (There is a reason why someone can get a T10 of $100,000 for $10-$20/month). Because there are so few claims, there are very few post claim investigations. But of those claims, I’m sure there is an astronomical difference between the percentage of declined payouts between fully underwritten and post claim underwritten policies. So in reality, very few people are actually affected by post claim underwriting, but many COULD be.

    Post claim underwriting just gives the insurance company a reason not to pay for anyone who has ever experienced any kind of health or lifestyle “incident”.

  25. By the way, if anyone wants to compare the cost of their post claim underwriting mortgage life insurance policy to a fully underwritten term life insurance policy, they can visit http://www.shopforinsurance.ca/

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  28. Thank you for the information inside the article. That will surely helps me on thinking what is the different between the mortgage insurance and the life insurance. Thank you again.

  29. I will not be surprised if a customer who has been scammed to walk into a bank and gun down the employees.

  30. Not sure why insurance companies are so critical on banks when the mortgage insurance sold by banks is underwritten by insurance companies such as Canada Life. If you have mortgage insurance, check your certificate of insurance and you’ll see who is underwritting these policies.

  31. Pre-Existing conditions will kill you . They will find any excuse in the book to deny you coverage . If you have just checked your blood pressure that’s considered to be a high blood pressure ( hypertension ) situation .

  32. I noticed that the couple absolutely commited insurance fraud if even unintentionally. The problem here was a lack of training at the bank and the couple trying to get away with answering dishonestly.

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  34. Ray,
    I very much appreciate your clarity and the simplicity of your explanation. You helped me make my decision.

  35. This whole topic was recently covered in a Marketplace episode. Beware of bank offered Mortgage Insurance and shop around for the best deal. Simplified issue and guaranteed acceptance insurance can cover people that previously felt they were not insurable.

  36. I luckily found al this out through PFS Halifax. Also whats really sad, if you search up “creditor versus term insurance” theres a link that brings you to cibc and it says how creditor is better, and the grossest point is they say how for term you need to get a medical exam and a questionaire and that with creditor you can easily be approved. its sad to see banks still happily trying to scam the unknowing populace out of their hard working money.

  37. T J is right, the key is pre-existing conditions. Most people either don’t understand the wording when asked about them or think they can sneak by with a white lie unwittingly voiding their bank issued insurance where they don’t underwrite up front in most cases.

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