The Top 5 Life Insurance Loopholes with Ellen Roseman

Posted on May 7, 2014 and updated May 30, 2018 in Insurance Types, Life Insurance Canada News, Mortgage Insurance, Non-medical, Travel Insurance 7 min read
authorphoto
Ellen Roseman gives us the lowdown
on five life insurance loopholes.

Life insurance is a difficult concept to wrap one’s head around. But even when you think you have more than a basic understanding, insurance contracts are embedded with many loopholes and restrictions that often trip up consumers.

As the personal finance columnist for the Toronto Star, Ellen Roseman has written about every one of them, so we invited her to take us through them all and share her candid advice on how to avoid them.

1. Sly Sales Tactics
Banks tellers won’t sell you straight-ahead life insurance, but they will sell you more limited variants like travel insurance or mortgage life insurance (meant to pay your mortgage in the event of your death). For Roseman, though, the first loophole isn’t embedded in what they’re selling, but how they’re selling it.

“I’m talking about how it’s sold over the phone or by tellers in a branch. It’s usually an afterthought, they’re not well trained in it and people often have no idea what they’re buying, or even that they’re being pitched to buy it.”

For example, with mortgage life insurance, often people walk into a bank and are talking about their mortgage with the teller when, at the last minute, the teller asks if they would like a life insurance policy to cover it. Of course, most people are on the fence about this, so the pitch begins.

“A lot of people feel that they have to sign up for mortgage life insurance, that it’s tied to the mortgage and together they are a package deal,” says Roseman, adding that the banks deny this and will insist tied-selling is against the law, but then will simultaneously make it clear that if you don’t have life insurance, you should buy their product.

This product is generally inferior to individual life insurance policies sold by independent brokers because with mortgage life insurance, the coverage amount goes down over time while the premiums you’re paying remain the same.

“If you say, ‘No, I don’t want mortgage life insurance,’ the banks will turn around and tell you that you need to sign a waiver saying that they offered you mortgage life insurance but you refused, which is pretty heavy-handed stuff,” says Roseman.

“They don’t really encourage people to shop around,” she adds. “They make it sound to many people as if they’re being forced to buy this life insurance and they also make it very difficult to transfer the coverage if people change their mortgage midstream.”

These same pressure sales tactics are seen with credit card insurance as well (the insurance meant to pay off your credit card balance in the event of your death). The salespeople are trained to have an answer for your every reason not to buy it.

2. Balance BS
If you’re one of the 50% of Canadians who pay off their credit card balance every month, you may notice a particular life insurance loophole if you look carefully at your credit card statement.

“It used to be that if you didn’t carry a balance on your credit card, you didn’t have to pay the premium for your credit life insurance plan that month, but now that’s changed and you pay the monthly premium whether you carry a balance or not,” confirms Roseman.

Plus, your credit card balance is only paid off in full if you die. In the event that you find yourself disabled or sick with a critical illness, the policy will only pay the minimum payment, which is 2% to 3% of the balance.

3. Negative-Option Billing
To make sure your premiums are virtually guaranteed every month, both credit insurance and mortgage life insurance exercise negative-option billing, which means you keep getting charged unless you cancel the policies yourself.

“CBC Marketplace did a piece on credit insurance and found that two of their staffers had it and didn’t even know about it,” says Roseman.

“The amount that they paid over the years was like two or three thousand dollars, so it can really add up if you’re not careful and it’s not that effective. You’re better off getting a line of credit and paying your existing balance that way.”

4. Exclusions
Banks use the same underhanded sales tactics when they sell travel insurance. After all, you’re taking the trip anyway, right? But Roseman says what really trips people up when it comes to travel insurance are the exclusions.

She wrote a story about a man who purchased travel insurance from a bank and asked if he still qualified despite having a heart condition. The bank told him that he did but neglected to tell him that if he changed his heart medication (which he did) he would no longer qualify.

“Banks are good in one way because they have a process for handling complaints and an ombudsman, but banks may get more complaints than life insurance companies because of the number of people who don’t understand what they’re getting,” says Roseman.

Recently, a BC woman was on the hook for $500,000 in medical bills after being injured in a skydiving accident in Arizona because her travel insurance policy did not cover accidents related to extreme sports. This is called a “lifestyle exclusion” and it exists in both travel and life insurance. Many life insurance policies will not pay out if the policyholder dies under extreme circumstances, such as bungee jumping or while in a war zone, so look at your policies carefully.

Track them just as carefully too. Roseman has found that many credit insurance policies expire at age 65 or 70, but people at that age are still being charged the premiums due to problems in banks’ computer system.

5. Post-claim Underwriting
Banks don’t really ever know your health status, which can come back to bite policyholders big-time.

“Do banks ever really check you out beforehand?” asks Roseman. “They sell you the insurance, but they don’t actually send a nurse to your house.”

She’s pinpointed the core conundrum presented by post-claim underwriting. This is when someone is sold a policy. They begin to pay the premiums, but the underwriting to see whether they qualify for coverage isn’t done until the time of claim.

This leaves many policyholders with claims holding the bag at the most inopportune moment, as their inevitably changing health status and advancing age often disqualifies them from coverage right at the time they need that coverage the most.


“Even though the fatal illness the policyholder dies of may have nothing to do with a pre-existing condition such as diabetes, the banks and insurance companies say that if anything is left off the form, answered incorrectly, or there is a mistake, the whole policy becomes null and void. Then, you get back your premiums, which is a pittance compared to the insurance coverage you thought you were getting,” says Roseman.

Loophole Avoidance Advice…

To avoid these pesky life insurance loopholes, Roseman advises asking for more time to go over the policy.

“Never say yes over the phone, especially if they’re bugging you and they want an answer right away,” she says. “Instead say, ‘Send me all the information. I can’t make up my mind,’ and then hopefully you check out the other policies as well to see what they’re offering and what the language is like.”
 

For more from Ellen Roseman, visit www.ellenroseman.com.

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Justin P
Justin P

How can I check which policy my life insurance with Met Life is convertible to I can’t find their website

LSM Insurance
LSM Insurance

Hi Justin, Thanks for the note. Met Life was sold in Canada a few years back – part of the policies are with Sun Life and part are with Equitable Life.

Check who is withdrawing money from your account and phone them up an asked what your conversion options are – try and get a response in writing.

Jack
Jack

Do all no medical plans come with a graded benefit. I was under the impression they do but my MGA says they are a gauranteed issue no wait plan

LSM Insurance
LSM Insurance

Assumption Life, Canada Protection Plan and Industrial Alliance all have No Medical Simplified Issue plans with no waiting period. I’m not aware of any No Question Guaranteed Issue immediate pay plans

Karl
Karl

Can you verify what the rate would be for a male 51 year old non smoker. I was diagnosed with MS 2 years ago

LSM Insurance
LSM Insurance

Thanks Karl. The premiums would depend if you at at a Traditional fully underwritten policy or a No Medical Simplified policy. It will also depend if you purchased a Tern or Permanent policy will send you a separate email now.

Lora
Lora

Interesting article. What would you recommend the best way to deal with these tactics the banks use? The article mentioned in the end that the bank had neglected to tell them man that he would not qualify if he changed his medication. How would you go about avoiding situations like this?

LSM Insurance
LSM Insurance

Thanks Lora. I would make sure to get things in writing. One of the challenges with dealing with the bank is the whole issue of post claim underwriting. Whereas with most individual life insurance policies the underwriting is done up front and not at the time of claim.

Frank
Frank

If I switch life insurance companies do I have to redo my medical tests. I did a blood tests about a year ago

LSM Insurance
LSM Insurance

Thanks Frank. Insurance companies can sometimes share medical tests for up to 6 months.

If you switch companies you would have to re verify your health – a replacement form should be completed which is for your protection and compares the two policies. If you do decide to switch -don’t cancel the one policy until the new policy is approved.

Justin
Justin

How do I know if we my policy has a 2 year period? I heard some companies have a 2 year waiting period on the death benefit

LSM Insurance
LSM Insurance

Thanks for the note Justin. You are likely referring to a deferred death benefit found in some Simplified Issue policies and all Guaranteed Issue policies. You can ask the insurance company or check the policy document. If contacting the insurance company try and a get a written response. You may also find this article comparing death benefits helpful https://lsminsurance.ca/life-insurance-canada/2014/02/different-death-benefits