RISCARIO INSIDER

July 30, 2011

TWO TYPES OF INSURANCE YOU MAY HAVE BUT CAN’T OWN

You can look at the menu,
but you just can't eat.
You can feel the cushion,
but you can't have a seat.
— Howard Jones

There are two common types of insurance you may have but can’t own

mortgage life insurance (which has pitfalls)
group insurance

There's an easy way to tell: you don't receive a policy contract. Instead, you receive a certificate. The contract belongs to the creditor (for mortgage life insurance) or employer (for group insurance). They can make changes. There's nothing you can do about it.

If you're healthy, you're subsidizing those who aren’t. That's because you are not underwritten personally. Your rates are blended. It’s like everyone borrowing at the same loan rate, good risks and deadbeats. How fair is that? This structure is simpler for the insurer and policyowner. You probably don’t care (or know) unless you’re paying some or all of the premium.

Which Is Worse?

Mortgage life insurance from your lender is a poor choice since it's not designed to protect you. The creditor is concerned about themselves. Yet they make you pay to protect them. What about protecting your family and yourself? That's not their concern.

The creditors have immense buying power. They could get insurance at low wholesale rates. Instead they add a large mark-up and get you to pay the premiums. Not only are you protecting them, they're making a profit. People still buy. That's marketing!

Group insurance is reasonably good. Your employer has an incentive to find low rates because they pay for some of the coverage. There are limitations and drawbacks. Our dental insurance used to pay for cleanings every six months but that's been changed to nine months. We weren’t told. We don’t have a say. The bigger drawback is that you lose coverage when you leave the employer. Your departure may not be your decision.

If you have your own life insurance and critical illness insurance (and perhaps disability insurance) in place, you're immune. You've already built the costs into your budget. You're used to paying. If you don't buy insurance until you lose your job, you're in a bind. You've lost your income and face the stress of seeking a new job. You'll notice the new expenditure. You might even decide to forgo insurance until you're working again. What does that do to your stress level?

What’s Better For You?

When you’re paying the premiums, your best solution is to own your life insurance personally. You then have full control because you're the policyowner. You choose how much coverage to get. You choose from the products available. You choose your beneficiaries. Depending on the structure, you have 100% creditor protection for extra peace of mind.

If you own a private corporation (Canadian-Controlled Private Corporations), you can have the insurance owned there. You're now paying premiums with lower-taxed corporate dollars. However, you lose creditor protection. You can reduce the risk by owning the insurance in a holding company rather than an operating company. Choices, choices, choices.

Podcast 128 (4:40)

direct download | Internet Archive page | iTunes

PS When you're on the road, recall the most dangerous part of driving.

July 23, 2011

THE PITFALLS OF MORTGAGE LIFE INSURANCE

When you're gambling, the “house” expects to win. They’re on the lookout to make sure you don’t have insider information that puts the odds in your favour.

Term life insurance is a form of gambling. The products are sold at the younger ages where death is unlikely. Rates increase sharply with age and coverage is not available near life expectancy where payout is most likely. Insurers also underwrite each applicant individually, medically and financially. You’re required to disclose insider information. If you're a smoker or otherwise unhealthy, you pay more or get rejected.

If you’re honest, healthy and financially sound, you’ll likely get insured. More important, your claim is very likely to be paid. You have peace of mind. That’s not true for mortgage life insurance from your lender.

Uncertainty

The mortgage life insurance your bank offers you works differently. Buying insurance makes sense since you wouldn't want your family to lose their home if you pass away. You might sense pressure to buy coverage from the bank. That’s called tied selling and is illegal. Yet you’re vulnerable. If you refuse, will your mortgage be approved at a preferred rate?

If you buy, you're getting what is called creditor insurance. The bank is the creditor which means you're the debtor. Creditors worry about protecting themselves, not you. They also make nice profits from this type of insurance.

Since there are so many mortgages and so few claims, underwriting you at the time you buy is expensive. Why not underwrite you at the time of the claim? That makes financial sense to the creditor but what about you? You don't know if you're insured until the exact point the money is needed.

Did you notice the inconsistency?

The bank does extensive financial underwriting for your mortgage because they're concerned you might default (and inconvenience them). They don't bother to do insurance underwriting because that would cost them now and the risk of claims is low. Put differently, they're more worried that you'll default than die. Do you have the same priorities?

Consequences

The perils of buying mortgage life insurance from the lender are well known. Here are seven articles for background:

Mortgage insurance not always a sure thing (CBC Marketplace video, Feb 2008)
Mortgage insurance vs life insurance (Canadian Capitalist, April 2009)
Perils of a mortgage life policy (Toronto Star, April 2007) + addendum (Ellen Roseman)
Don't buy insurance from banks (Ellen Roseman, April 2009)
Post-claims underwriting (Money Smart blog)
Why am I denied insurance coverage? (Thicken My Wallet, May 2009)
Why I won’t sell mortgage insurance (Dave The Mortgage Planner)

Protect Yourself

You protect yourself by buying your own insurance elsewhere for flexibility. You then decide where the proceeds go. You'll probably want to cover debts like your mortgage and leave money for your family to replace the income you provided. You'll likely save money too.

Insurance advisors range in quality. You won't get true peace of mind unless you take the time to select an advisor you can trust. That’s key to getting your claim paid.

There's one weak reason to buy mortgage life insurance. If your claim looks reasonable but is getting denied, the media may help. The bank may then make a business decision to pay to avoid bad publicity.

Post-claim underwriting is not consumer accountable but is still with us. Buyer beware.

Podcast 127 (4:50)

direct download | Internet Archive page | iTunes

PS Before ditching your mortgage life insurance, be sure you have a replacement securely in place.