I don’t like bank insurance.
Alright, I’m obviously biased since I sell insurance and I don’t work at a bank but I can make a pretty compelling argument. Feel free to debate me in the comments.
A little history
The big banks in Canada have been trying to get into the insurance market for a long time. Until very recently they have had limited success. Currently there are two main banks in the Canadian insurance market, RBC Insurance and BMO Insurance (formerly AIG). While the regulators have not allowed banks to sell insurance directly, they have allowed banks to purchase insurance companies and rebrand them under their parent company name.
Royal Bank of Canada purchased Unum Provident in 2004, changing the name to RBC Insurance. More recently Bank of Montreal purchased AIG Canada and renamed it BMO Insurance. While banks themselves still aren’t allowed to play directly in the insurance pool the waters are getting murky.
I am going to show some of the weaknesses in purchasing insurance from a bank, now I don’t mean RBC Insurance and BMO Insurance, they are real insurance companies, I have happily placed business with RBC. I am talking about walking into your regular bank branch and buying insurance, or at least what the banks call “insurance”. These policies aren’t strictly a contract of insurance, they are an insurance certificate. They typically overwhelmingly favour the banks. The banks retain ownership of the certificate and they are the beneficiary of the certificate. I will make the distinction between an “insurance policy” issued by an insurance company and an “insurance certificate” issued by the banks.
“When you buy insurance from the bank, the bank is the beneficiary not you!”
You may be familiar with bank “insurance certificates” specifically the certificates they try to sell you when you take out a loan, line of credit or mortgage. When you buy Mortgage Insurance from a bank you are actually doing the bank a favour. The bank makes money by charging you interest on your loans, they want that interest payment, not your house. If you died, or became disabled you would be unable to pay your mortgage, the bank would lose its interest payments, and would be forced to go into the costly process of foreclosure. The bank really doesn’t want to own your house, so what do they do? They convince you that it is a good idea to pay for insurance.
If you die, all is forgiven your mortgage is paid off. You get to keep your house, and the bank doesn’t have to foreclose. Sounds fine, where’s the problem? I’ll show you.
First off, the bank owns the insurance even though you pay for it. Why does that matter? Well if you refinance or change lending institutions you don’t get to take the insurance with you, it stays with the bank. If your health has changed, you might not be able to get any more insurance, ever! If you want to keep the insurance you will be tied to that one bank, and may have to give up moving to another bank with a better rate, potentially costing you thousands of dollars. An insurance policy from an insurance company is owned by you, it doesn’t matter who the mortgage is with.
Secondly, the insurance is always decreasing. As you pay down your mortgage, your debt decreases, since the insurance only forgives your debt, not the original value of the mortgage, your insurance declines. One big problem is that your premium doesn’t also decline. Towards the end of your mortgage when little is owed, you are still paying full price for a fraction of the coverage. A real insurance policy can be reduced over time as your debt falls, but the premium decreases.
Third, the bank is the beneficiary. When you die your debt is forgiven, you never receive any cash. Now you own your home outright, which is great except for the fact that if you die or become disabled, what you really need is cash. Your mortgage payment disappears but you still have to pay for taxes, utilities, food etc. Wouldn’t it be infinitely more helpful to be given a cheque for $500,000 tax free, yours to do with as you please, than to just be gifted your house? With the cash you can still pay off the mortgage if you want, or use the interest earned to make your monthly payments, invest it, or just live off it for a time while you or your family recover from this life changing event.
Lastly, it costs too much. You just bought a new house; you are excited and ripping through stacks of paperwork to close the deal. Banks know you will sign just about anything they put in front of you at this time, so they slide in an application for insurance. They will build the premium into your mortgage payment; you will never even know it’s there. They know you probably won’t look for a second opinion or shop around for rates so they can charge you an arm and a leg, and you will pay it. Want proof? Here is a quick comparison of rates that I can get vs. TD Bank, the largest seller of mortgage insurance in Canada. My policies are better for all of the reasons mentioned above yet they are a fraction of the cost of what TD charges.
In an effort to be fair to TD, they do have the absolute cheapest rates I have ever seen on Critical Illness Insurance, they are also the largest seller of CI in Canada, beating every insurance company there is. The downside? You can only get it if you buy their lousy overpriced life insurance first.
Other considerations
Limited benefits, banks tend to have a limit on the amount of insurance they are willing to offer you, typically the value of your mortgage or $500,000 whichever is less. What if you want to provide a years worth of income to your family? Or pay off other bills? Or your mortgage is more than $500,000? With an insurance company, we don’t have arbitrary limits.
Flexibility, bank insurance tends to reset every 5 years with your mortgage rate. You have no choice of the term of your policy. You are also limited in the amount of insurance, you can choose either the entire amount of the mortgage, or half, no other options are available. With an insurance company you can choose terms from 5 to 40 years, and any benefit amount you choose.
Underwriting, banks don’t do any medical underwriting, and this is one of the big reasons they cost more. With a bank you answer a short questionnaire about your health and that’s it, you insured. The fact that you are a smoker or that you are an Olympic athlete don’t have an impact on your premiums. Banks tend to do their medical underwriting at the time of a claim. They will look back at your medical records after you died, and decide if you were healthy enough to insure after the fact. If there was evidence that you were uninsurable, kiss your benefit goodbye. Insurance companies underwrite before a policy is ever issued, this process ensures that if you are approved your benefit is fixed and guaranteed. Sure an insurance company will look back at your application at the time of a claim but it is far less likely that problem will exist since the underwriting process is so much more thorough and complete.
Conversion option, with a bank policy it only lasts as long as you are a client of the bank, once your mortgage is paid off your insurance is gone for good. A real insurance policy has a conversion option which will allow you to convert your term policy into a permanent policy that will last the rest of your life.
As you can see, there are a lot of weaknesses in bank insurance. While convinient, you might just want to put in a little bit extra effort to get a proper insurance policy.
If you want to open a chequing account, go to a bank. If you want an insurance policy, go to an insurance company.
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