by Glenn Cooke
When your bank mortgage life insurance doesn’t actually pay off your mortgage!
I’m Glenn Cooke and I’m The Term Guy.
You sign your mortgage papers at the bank and the bank employee asks if you want mortgage life insurance. You’re a prudent person and want to protect your family, so you check the box Yes. You go home safe in the knowledge that if you pass away prematurely, your mortgage will be paid off for your family.
But wait – there are a variety of circumstances where your family may not actually have the mortgage paid off. I’m sure it’s an unpleasant surprise for your family to find out that the mortgage isn’t paid off, considering you’re now dead and it’s too late to fix it.
So, the first way you may not be covered is due to the way bank mortgage life insurance handles medicals – it’s called post claim underwriting. Basically what the banks do is they accept everyone who says they qualify for the life insurance, without any underwriting. Then, should you pass, THEN the look at your application to decide if you were actually insured. We have a link to a video posted from CBC marketplace that shows how consumers can rarely, if ever actually answer the medical questions correctly. So you pass, THEN they pull up your application and decide that even though you’ve been paying premiums, you were never actually covered, so – no mortgage life insurance.
This is actually crazy. Let's make up some numbers to illustrate. Let's say 1000 people apply for bank mortgage life insurance. But lets say 500 of them don’t actually qualify – but of course they don’t know that because their application wasn’t medically underwritten. Out of those 500 people paying premiums lets say 10 die – and of course those claims are denied. The bank not only didn’t pay those 10 claims, they’ve been collecting premiums from the other 490 people for their entire mortgage – right to their bottom line. These people were never actually covered, but they’ve been paying premiums without any recourse.
So, second way you can not be covered is the way the banks handle their maximum limits. If you take out a mortgage that’s above their life insurance maximums, then you will NEVER be covered for the full amount of your mortgage.
Here’s how it works. Lets say you take out a $1,000,000 mortgage, but the bank’s maximum insurance is $600,000. OK, everyone gets that on day one if you die, you’re only covered for 60% of the $1,000,000, or $600,000. But time rolls on and you pay down your mortgage down to $600,000. Now you’re fully covered, right? Nope – they don’t maintain the $600,000 maximum, they maintain the 60%. So if your mortgage is now $600,000 and you die, you’re only covered for 60% of $600,000, or $360,000. Your family still owes $240,000 on your mortgage.
Now lets look at term life insurance like we offer here at mortgageinsurance.ca. When you apply, the life insurance company performs medical underwriting before they offer you a policy. That severely restricts their ability to deny claims after the fact, particularly if you’ve fully disclosed everything.
Secondly, with term life insurance instead of being limited to lower limits like $600K, you can purchase a full $1,000,000 policy to cover your mortgage. So there’s no need for being under-insured right from the start. And as you pay down your mortgage, the $1,000,000 term policy remains level at $1,000,000 of coverage – guaranteed.
That’s why every consumer advocate in Canada that I’ve ever heard speak advises consumers to switch their bank mortgage life insurance over to a term life insurance policy.
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