After hunting down the best interest rates, negotiating terms of a intimidating mortgage, providing every financial detail you could scrape out of your filing cabinet and signing a stack of papers, your banker asks if you want creditor insurance.
You haven t done any price shopping ahead of time and the second last thing you want to do is read any more fine print. However, the absolutely last thing you want is to leave your family with this big debt if you died.
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Ted Clysdale, insurance broker and director on the Canadian Association of Farm Advisors, says it does pay to take that time to compare the value you will get for the premiums you will be paying. Most people don t shop around, says Clysdale from his office at Peterborough, Ont. Life insurance is often an afterthought.
Loan, mortgage or creditor insurance is basically group term-life insurance sold by creditor agents, namely banks, and it is optional. Some policies also include disability or accident coverage.
In Clysdale s experience as a broker selling different policies and formerly working for a bank, an independent term life insurance policy is better value than mortgage insurance. I ve seen as much as 30 to 40 per cent cheaper, he says.
Post-claim underwriting
When you sign your mortgage papers, the insurance form typically involves answering a few health questions. You check a couple of boxes, sign on the dotted line and the premiums are buried in your monthly mortgage payments.
Sometimes, that convenience comes at a significant cost.
For a regular-term or whole-life insurance, premiums are underwritten or calculated before you start paying them. Pages of health forms are filled out, blood work is done by a nurse and you may even get a battery of lab tests. Then actuaries take
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the results and calculate your chances of dying at certain ages, setting your premiums according to your risk.
With post-claim underwriting, the health questions and checks are done after the person dies. They don t check your medical history and the few questions are long and a little ambiguous. There is a reason these questions are worded this way. If you have a health condition when you sign the papers whether you and your doctor are aware of it or not and it s not disclosed, your claim may later be denied.
That means, even though you have been paying the premiums, benefits may not necessarily be paid.
With mortgage insurance there are a couple elements of uncertainty, says Clysdale. There s a small risk that they won t pay out.
Also be aware, the payout with mortgage insurance goes directly to the bank, not to your estate.
Not so with term insurance. Your beneficiaries decide what they re going to do with the money. So if they want to pay down more expensive debt, they can. If they want to keep the farm debt and go on a cruise, they can.
You should also be aware that mortgage insurance cannot be moved. So if you switch lenders or need another loan, you ll need to take out a new policy. Term-life insurance is more portable, says Clysdale, because it s attached to you rather than your debt.
For some farm credit or mortgage insurance, the term of the insurance matches the amortization of the loan, not the interest term. For other policies you have to renew after a given specific term and likely your premiums will go up with your age. Worse, if your health changes, you may not be eligible to get the coverage extended.
Descending value
With regular term-life insurance the premiums and the amount that will be paid out to your beneficiaries if you die stay the same through the life of the policy. You decide how long a term you ll require. The negative is that as you pay down the loan, you don t require as much life insurance coverage.
With mortgage insurance, the amount of coverage declines as you pay down the principal. Make sure your policy premiums allow for this descending value according to how much loan you have left. Also consider lump payments. According to a recent report by CBC sMarketplace,some house mortgage insurance policies don t decrease the premiums as the loan is paid off.
The insurance companies and banks have created several types of policies. For example, FCC sells three types of creditor insurance. With reducing balance insurance, the premiums stay constant for the duration of the insurance but cover a declining balance as the loan is reduced. In fixed-coverage insurance, the amount of coverage stays constant and the premiums are adjusted every five years based on the loan principal balance and your current age. (Fixed-coverage insurance may have a good fit where the customer wants a partial amount of insurance but be forewarned that as you age your insurance premiums get more expensive.) Finally, FCC also offers revolving insurance, where the premium and coverage change as the loan balance fluctuates.
Insurance companies have created mortgage insurance with no underwriting costs for the banks to sell. There s no sales commission, which means the bank staff doesn t have to be qualified to sell insurance.
This also means that bank and credit managers can present only their own insurance when discussing the loan. They aren t licensed to shop around on your behalf.
The exception is Alberta, the only province where anyone selling credit insurance, including bank employees, needs to be licensed. When the Alberta Insurance Council first implemented this regulation in 2001, the banks fought back, pursuing the matter all the way to the Supreme Court of Canada. Six years later, the Supreme Court ruled the province could regulate the sale of this insurance.
FCC and most of the banks sell group life and accident insurance to their customers, and it s extremely profitable. From the 2010 FCC Annual Report, gross insurance revenue was $16 million, and claims of $7.6 million were incurred. For 2011, FCC is projected to net insurance revenues of $8.5 million. Those aren t bad returns for an add-on with limited administration costs and no capital expenditures.
It s not mandatory that all FCC loans be insured, says va Larouche, communication consultant with FCC. However, in some credit-risk situations, insurance might be a condition of a specific loan. In those cases, you may need to have insurance that s assigned to your bank, not necessarily bought from your bank.
Currently about 21 per cent of our AgProduction and AgValue portfolio is insured with FCC creditor insurance, says Larouche.
The purpose of credit life mortgage insurance is to protect your loved ones from making mortgage payments if something were to happen to you. This type of insurance may not be applicable if you do not have any dependants who would need to keep your home if something happened.
You re allowed to cancel a mortgage insurance policy anytime, but be aware that you ll lose premiums already paid. Most of these policies can be cancelled within the first 30 days, with full refund of premium.
Again look for these details in the fine print of any policy before you sign, say advisers like Clysdale. And don t be afraid to ask questions.CG
