So every once in a while, when speaking about the topic of Life Insurance I get this objection, or something similar.
“When I took out my mortgage the bank offered me Life Insurance too, since that’s my only debt my family will be fine.”
The fact of the matter is that under Canadian law a bank employee is actually prohibited from selling any type of insurance product, whether it be life, disability, property (such as home and auto) or casualty insurance to consumers. What they are really selling you is not insurance for yourself but the privilege of paying premiums on behalf of the bank so that if you die (or in the case of disability insurance that they also sell, become disabled) while you still owe them money the insurance company will step in and pay off your debt. You won’t ever see a dime of that money. You do not actually own the policy and cannot a name beneficiary, both the owner and the beneficiary remain the bank itself.
If that’s not enough to give you pause it doesn’t end there. There is no real underwriting on a bank owned life or disability insurance policy. Instead they ask you about half a dozen questions and then wait until you get sick or die to do any kind of due diligence on your answers. If you lie, forget the facts, or simply misunderstand the questions your claim could be denied right at the time when you or your loved ones are the most vulnerable. Your family could be left holding the proverbial bag for a mortgage payment they can no longer afford.
There is also the small matter of the pay out. Since the bank is the beneficiary and the policy is design to only pay out the balance of your mortgage it makes sense that over time, as your mortgage balance drops so too does the amount the insurance company needs to pay the bank. With that being the case you would think that your premiums would drop as well but they don’t. You pay a level premium for the entire time you hold the mortgage, regardless of the balance.
By contrast a true life insurance policy that you own allows you to designate any beneficiary you like, both payout and premiums remain level for the entire life of the policy and all underwriting is done prior to the policy going into force so if you have high blood pressure or forget to disclose your genetic predisposition to heart disease the insurance company will be aware of that before offering the coverage and will build the possibility into the premium you pay, resulting in far fewer instances of claims being denied.
The good news is that the bank is also legally obliged to give you the chance to opt out of their coverage. When buying a house, as with any major purchase or life event it’s always a good idea to consult with a qualify third party financial advisor. Independent financial advisors work for you, not the banks, and they may be able to help you identify far more than just your insurance needs.
For more information and a better explanation of the payout arrangements on bank owned life insurance check out this article from a fellow financial advisor posted a few years ago (Mortgage Insurance vs. Life Insurance) or email me at email@example.com