Tara A. Miller, Q.C. & Dan MacLellan January 2021
This is the 2nd in a series of 5 blog posts addressing issues that can arise with life insurance with the goal of empowering you and your family with information to ensure any life insurance you acquire will be paid after your death. Today’s post looks at the differences between life insurance obtained from a bank VERSUS a licensed life insurance broker/agent. Upcoming blog posts will include:
- What to do when life insurance is denied
- Tips for avoiding life insurance denial
- What to do when there is a dispute over who the life insurance beneficiary is
There are two ways to obtain life insurance: 1) from a licensed life insurance advisor who brokers an agreement on your behalf with a life insurance carrier; or 2) from a bank which sells creditor protection life insurance to cover a bank debt like a mortgage, line of credit, car loan, business loan, etc. There are critical differences between these two insurance products which many people do not fully understand and can have a significant impact on whether the life insurance benefit is ultimately paid after the death of person whose life is insured.
I have asked Dan MacLellan, an insurance industry veteran, President of MacLellan & Moffatt Health Insurance Ltd., and head of Lawyer’s Financial/Canadian Bar Insurance Association (“CBIA”), to explain the differences between the two types of life insurance for consideration in your search for life insurance, or review of what you currently have in place.
After taking on the role of the CBIA here in NS just under three years ago (and surrounding myself with lawyers as clients), my eyes have really been opened up to the amount of litigation that is taking place with life insurers on declined claims.
As the owner of a multi-generational life insurance business started in the late seventies, I am responsible for clients, ranging in ages from 2-100 years old, with life insurance policies across the major insurance companies in Canada. In my experience I have seen 1 declined life insurance benefit and 1 rescinded contract (the ability for the life insurer to negate the contract within the first two years due to an intentional mis-statement of fact) in the past 18 years.
I was trying to find the cross over on why the law firms were so busy representing clients whose life insurance claims have been denied, and why my company was not seeing these issues. And then it struck me. The law firms are not representing clients with traditional private life insurance policies set up by licensed professional advisors. They are representing clients with creditor protection insurance, sold by the bank.
Understanding the difference between life insurance from a licensed life insurance agent and a bank (and recommending a licensed advisor!)
First, let’s review the differences between a private life insurance policy VERSUS one obtained from a bank as credit protection insurance to cover off a debt such as a line of credit, mortgage, car loan, student loan or business loan.
If you are running short on time, and need one take away from this list, please go directly to item 3- Mortgage Life Insurance is Underwritten at time of Claim. Take a minute to think about that one. It means that only once the person has died, upon their death, does the mortgage company then start combing through their prior medical history to determine if they would have been eligible for the coverage in the first place! Again, to be clear, the person who thought they had been approved for life insurance on a bank product is now deceased and obviously not able to look for life insurance coverage elsewhere as they could have done had they known from the start they would be declined for coverage.
- Ownership
When you purchase private life insurance, you own the policy. If you buy mortgage life insurance, the mortgage lender holds the policy.
In other words, the mortgage lender is the sole beneficiary of the mortgage insurance, whereas with private life insurance, you decide who will be the beneficiary.
- Beneficiary
Elaborating on the above statement, again it is you who defines the beneficiary with private life insurance. That means you can also change the beneficiary. For example, you could change the beneficiary to your kids in case there was a divorce. With mortgage insurance, only the lender can be the beneficiary.
- Mortgage Life Insurance is Underwritten at time of Claim & Medical Testing
With mortgage insurance, there is usually no medical testing, just a few medical questions. The bank employee is not able to answer any of your questions about what the medical questions mean. This can be to your detriment. Despite answering to the best of your knowledge, you may have forgotten about that time a walk-in clinic doctor tested you for high blood pressure, or misunderstood what a medical term means. If you failed to mention the blood pressure test or misunderstand a medical term when you answered a question, then your claim could be denied. The problem with mortgage insurance is the underwriting happens after the claim is made, meaning they can look for all kinds of reasons to deny the claim.
While there is medical testing with private life insurance, it is for your benefit, to protect you in the case of a claim. The life insurance broker has confirmed your coverage before the policy has been issued thanks to the testing and application process. This means the insurance company is satisfied with the risk and has issued the life insurance policy with the intention of paying the claim upon your death.
- Policy Renewal
If you signed up for a 20 or 30-year term private life insurance policy, then you do not have to do anything beyond continuing to pay for your monthly premiums. With life insurance on your mortgage, you will need to renew the mortgage insurance every time you renew your mortgage. The problem is that if you renew every 5 years, you are also older, meaning you are more of a risk and so each time you renew, you will pay more in premiums. With term private life insurance, your premiums are locked in from the time the policy is issued remaining the same for the length of the term. Life Insurance is typically cheaper the younger you buy it.
- Portability
Private life insurance is always portable. You can change mortgage lenders, but your life insurance stays with you. Private life insurance does not protect your home unless you want it to. Whereas mortgage protection is only about protecting your home, not anything beyond that.
- Coverage
The amount of coverage you receive declines with mortgage insurance. Depending on your mortgage payments, the balance of your mortgage is less, meaning your payout is less, despite paying the same premiums. With private life insurance, the death benefit of the payout remains the same throughout your term.
- Regulation
The final sale of any private life insurance you choose to shop for, either online or through a brokerage, will be conducted by a certified life insurance broker or agent. The staff in a financial institution (a bank) are not required to have a license or pass any exams to sell mortgage insurance. A certified life insurance broker or agent should spend significant time with you reviewing the application process and questions. A bank employee who is not licensed cannot answer any questions about the application questions, medical or otherwise.
I have always likened the life insurance sold in a bank to “Would you like fries with that”. It is a brief, and lucrative, last minute “sale” during the signing off of your loan.
- Flexibility
Mortgage insurance stops when the mortgage is paid or if you choose to move to a lender that offers a better rate. With term private life insurance, you can extend your policy for a few more years or convert it into a whole life insurance policy.
The Bottom Line:
Mortgage life insurance is convenient because it is easy to apply for when you are getting a mortgage.
The downsides, however, are many. You have no confirmed coverage in place when you walk away from the bank because the coverage is underwritten after you die. Mortgage and life insurance are not mandatory. But, when it comes to protecting your most substantial financial investment, and your precious dependents from financial burdens, private life insurance is the way to go.
These blog posts are not meant to be legal advice or an exhaustive review of the law in this area. If you or a family member require more information, please contact MDW Law to schedule a complimentary consult with one of our personal injury and insurance law team. We regularly meet with and represent clients in the denial of life insurance claims.