Daren Givoque, Financial Advisor
O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.
When you purchase a home and get a mortgage through a bank it is likely that they will offer you Creditor Insurance.
Also called mortgage insurance or loan insurance, creditor insurance makes sure that you are able to pay off your mortgage or other loans with the bank in the event of your death.
While this may sound like a good idea there are some significant drawbacks to creditor insurance that you need to be aware of.
Premiums can increase at any time
Generally, these insurance programs are not contractually guaranteed meaning the bank may increase their rates at any time without consultation. They are also “age banded” which means they have the ability to increase the premiums as you age as the initial agreement is usually only valid for one year.
It is inflexible
Creditor insurance does not allow you to take the death benefit in a lump sum cash payment and continue to pay the mortgage. As soon as your mortgage and loans are paid off the insurance coverage is terminated. This also means that the insurance coverage is only as valuable as the mortgage, which is decreasing in value over time as you make payments. Finally, if one spouse dies prematurely the other may not be covered.
It is not a legal contract
Creditor insurance is not a legal contract and banks have the authority to terminate it as they see fit. With 30 days notice, the bank can cancel your coverage leaving you without Mortgage, Life or Critical Illness insurance. The insurance is also automatically terminated if you move your mortgage to another financial institution.
It does not cover mortgage penalties
There is often a penalty when it comes to retiring a mortgage early with a bank or other lender. Typically, this amounts to approximately three months interest. This penalty cannot be included in the coverage offered by creditor insurance which means you will be paying the penalty out of pocket.
If you have any health issues you won’t be covered
Generally, if any of the health-related questions are answered “yes” you will not be offered coverage and no underwriting will take place. Also, if the institution finds out about a health issue after the fact, even if you didn’t know about it when you applied for the insurance, your claim may be denied.
Luckily there is another option:
A Term Life insurance policy is generally a better way to protect you and your family in the event of sickness or death.
Premiums stay consistent and will not change throughout the term of your policy.
The coverage does not go down as you pay off your mortgage.
You can choose who your beneficiaries are and in the event of your death they can choose whether to use the payout to pay off the mortgage right away or invest the money.
You hold the cards when it comes to your policy, not the insurance company. Only you can cancel the policy and it stays with you even if you change banks or pay off your mortgage.
The insurance company will also do a full underwriting before the policy is issued, not at the time of the claim so you are unlikely to have any unexpected surprises.
Under a combined plan, if one spouse dies unexpectedly, the other is still insured.
Banks will make you feel like creditor insurance is the way to go, but they are just trying to sell you a product. The same coverage can be achieved through a term life insurance policy which gives you much more safety, flexibility and freedom than a creditor insurance plan offers.