Mortgage Insurance Pitfalls

Posted on July 31, 2014 and updated August 1, 2014 in Insurance Types, Life Insurance Canada News, Mortgage Insurance 6 min read
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If you’re an avid reader of the LSM Insurance blog, you know we’re not fans of Mortgage Insurance and neither, it turns out, is the Toronto Star’s personal finance columnist, Ellen Roseman.

In a recent article titled “Mortgage Insurance Policies May Not Cover Claims,” she highlighted the danger of post-claim underwriting. This is when the policyholder has filled out their application and has been diligently paying their monthly premiums, but when they die suddenly, their family discovers they are not entitled to a penny of the death benefit that covers their mortgage because the policyholder’s health circumstances had changed and the application is now filled out incorrectly.

It’s the ultimate bait and switch — take this example Roseman lays out in the article:

Vivian Elliot lost her husband in 1990. He died from a massive heart attack at age 51.

Six months later, she found out her mortgage life insurance wasn’t in force. The bank said the application was answered incorrectly.

“My husband brought the form home and we filled it out. As far as we knew, it was accepted,” she said.

“It was refused because my husband had ticked off a box saying he did not have lung disease. My husband had bronchitis and the insurance company stated this was lung disease.”

In the end, Elliot sued the bank that issued her the policy and won a settlement. The bank promised to train their staff to better go over the insurance forms with customers to avoid any further confusion.

After outlining one more example of someone who was screwed by mortgage insurance and the post-claim underwriting tactic, Roseman interviewed banking and insurance experts about the practice, including friend to LSM and CompuOffice Software founder Ami Maishlish, who had this to say about post-claim underwriting: “I strongly believe there are too many life insurance contracts out there, where the ‘approval’ is only for payment of premiums… The purpose of insurance is dual — coverage should the insured event occur and peace of mind. Post-issue underwriting defeats the second purpose.”

It sure does. Post-claim underwriting is actually deceptive and insidious in a number of ways. The first is the fact that the mortgage insurance coverage amount declines as your mortgage balance declines. Plus, it’s not portable, so you can’t transfer it to a new mortgage if you move or switch banks. It’s also not convertible to a permanent plan, so you can’t get the lifetime protection of an individual plan. Add to that, it’s very expensive.

A 38-year-old male and 37-year-old female will pay 28 cents a month per thousand dollars of mortgage amount on a mortgage life insurance plan with CIBC. On a $500,000 mortgage, this translates to $140 per month. That same couple can apply with Transamerica Life for $500,000 of Individual Term 20 coverage for $98.55 a month. If they qualify for preferred rates, their premiums could be as low as $71.10 a month. That’s a savings of $9,948 to $16,536 over 20 years.

Even Ellen Roseman agrees it’s much better to go with an individual life insurance policy sold by a broker to cover your mortgage. She weighed in on the underhanded sales tactics used by the banks who sell mortgage insurance when we interviewed her a while back: “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.

But there are ways you can avoid these high-pressure sales tactics and the conundrum of post-claim underwriting. All life insurance policies have an “incontestability period” — a time limit (usually two years) during which the life insurance company has the right to dispute a policy’s validity based on information provided incorrectly on the application.

Even though an inspection report is obtained, and in some cases a medical examination is performed, the company relies a great deal on the answers given on the application when deciding whether or not to issue a policy. It is important to remember that if an applicant fails to disclose information that would cause a policy not to be issued or to be differently rated, the policy may be withdrawn or a claim may be denied within this period.

With the policy in force after the incontestability period ends, the insurance company no longer has the right to deny claims or rescind the contract even if a misstatement in the application is discovered. The policy owner will receive all the benefits as stated in the contract. Claims will be paid and the policy cannot be withdrawn. This provision, however, does not apply in cases of fraud.

So read your insurance contracts carefully and if you don’t understand something, don’t be afraid to ask for clarification. If you can’t ask the teller or bank representative for help in person, Ellen Roseman has some tips for dealing with pushy sales agents over the phone.

“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.”

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Laurence
Laurence

It’s unfortunate what happened to Vivian Elliot. How does the bank classify a disease? Good point about the pitching. How do you make sure you are covered properly when you buy mortgage insurance in case something does happens to you?

LSM Insurance
LSM Insurance

Thanks Laurence. Make sure you get a copy of the application and review the questions thoroughly if you are unsure of the answer ask your doctor how you should respond to the question.

Eddy
Eddy

Thanks for the informative piece. My wife and I are looking to for a new house and we are definitely going to look out for the mortgage insurance that the bank will try to offer.

LSM Insurance
LSM Insurance

Good to hear!

Margaret
Margaret

Very informative. Does the bank specifically ask about obtaining a life insurance from them? Or do they automatically sign you up for it and it’s your responsibility to refuse it?

LSM Insurance
LSM Insurance

Margaret, the bank would ask you if you want the coverage. There are a list of health questions it is very important the questions are answered correctly. I would also make sure you get a signed copy of the application you signed and get clarification in writing if you are unsure about any of the questions.