Bank Insurance

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.

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“When you buy insurance from the bank, the bank is the beneficiary not you!”

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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.

Mortgage Insurance Part 2 - Disability Insurance

If you are unable to work, you don’t earn a paycheque, without a paycheque you can’t pay your mortgage. While most people have Employment Insurance (EI) in the event of a layoff, or short term disability, most people do not have any form of Long Term Disability (LTD) insurance. Of those with insurance most are covered through the benefits plan with their employer. Unfortunately for the self employed out there we do not have the luxury of an employer sponsors disability plan, we also don’t get EI benefits either. For people without a disability plan at work, or the self employed, disability insurance can be very important for your financial well being.

In terms of mortgage insurance, when you die your income earning ability stops, but so do your ongoing costs like food and shelter. If you are disabled your income stops, but you will have medical bills, grocery bills, and other expenses.

It makes just as much sense to have your mortgage payment covered if are disabled and it does to have life insurance in place in case you die.

Big Scary Statistics

• The chances of becoming disabled for 90 days or longer, at least once prior to age 65 is 1 in 3.
• The average length of a disability which lasts over 90 days is 2.9 years. ( Source: 1985 Commissioner’s Disability Table A & CIA 86-92 Aggregate Mortality table)

• You are also much more likely to be disabled before age 65 than you are to die before age 65.

Because you are more likely to be disabled than to die before age 65, disability insurance is far more expensive than life insurance. Because of the cost associated with disability insurance, it is important to take the maximum advantage of other benefits available to you such as Employment Insurance (EI) disability benefits, assuming you qualify for them.

Well isn’t the government going to take care of me if I get disabled?

Nope. Most employees are eligible for Employment Insurance (EI) disability benefits. If you are off work for 14 days due to illness or injury you can start to collect EI. Benefits are 55% of your pre-disability income, to a maximum of $435 per week for a maximum of 17 weeks. It’s not a lot of money, but it is better than nothing. Since benefits stop after 17 weeks that is the perfect time to have a disability policy start.

The biggest factors in disability insurance pricing are how long you have to be disabled before you receive a benefit, known as the waiting or elimination period, and how long the benefit is payable for. An elimination period of 30 days is about twice as expensive as an elimination period of 90 days. Also the policy that only has to pay out for 24 months is going to be a lot cheaper than the policy that pays for 10 years. By pushing the waiting period of a disability policy out to 120 days we receive the maximum EI benefit and obtain a far cheaper disability premium.

A 2 year disability policy is going to provide a big cushion for someone who becomes disabled. It can easily be the difference between foreclosure, a distressed sale, or bankruptcy and being able to squeak by and survive. If you are disabled for the rest of your life, you will probably have bigger things to worry about than your mortgage payment. In most cases if you are disabled for more than 2 years you are probably very seriously injured or will and will most likely not make a full recovery. That being said your lifestyle is probably going to be in for a big change. Selling your house is probably going to be part of that change. Because you would probably be forced to sell anyways, there is usually little point in taking out a policy that pays a benefit for 10 years or to age 65, 2 years and 5 years are usually going to provide the same level of assistance for a lot less cost.

Show me the money!

A big point to consider when buying disability insurance for a mortgage is who gets the money. When purchased from a bank, the bank gets the money, they waive your mortgage payment for the length of your disability. When you buy disability insurance from an insurance company, you receive the benefit, you can then use it to pay the mortgage amount, or not, it is up to you. A big caveat of buying from a bank is that if you are forced to sell your home, you lose your disability policy as well. Since you would discharge your mortgage with the bank the benefits stop. Buying from an insurance company, you continue to receive your benefit payments, as long as you meet the definition of disability under your policy. Your other financial issues are not considered in the benefit payments.

The taxman cometh

Disability insurance is a little tricky when it comes to taxation. If you own the policy yourself and pay the premium with after tax dollars, your benefit comes in tax free (good). If you have a plan through an employer or if your company owns the policy, your benefit could be considered taxable income when you claim (bad). Make sure you know if you have to pay tax on the benefit when you are setting up the policy. If the benefit is taxable you are going to need a higher monthly benefit to counteract the taxation drain.

Sweeping generalizations

Everyone needs to take their own consideration into account when setting up their policy. But to generalize a best fit scenario for most people, a disability policy starting after 120 days of disability, with a 2 or 5 year benefit period will provide the best bang for the buck. Paid personally the benefit is tax free, and when purchased from an insurance company you can do whatever you want with the money. The dollar amount of monthly benefit should at a minimum cover your mortgage payments, and fixed monthly costs like food and utilities. When set up like I have mentioned above an average 35 year old white collar worker can receive a $2000 per month benefit for about 30 bucks a month.



Robert Reynolds - GBA
Partner / Group Accounts Manager
HMR Employee Benefits Ltd.

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.

Mortgage Insurance

While often not required by the financing institution, mortgage insurance is a prudent purchase for most homeowners. Banks typically use the ambiguous term “Mortgage Insurance” but rarely define what you are actually paying for. For clarification purposes mortgage insurance will be broken down into three separate types of insurance.

· Life Insurance

· Disability Income Insurance

· Critical Illness Insurance

Life Insurance: The reasoning behind buying mortgage life insurance is fairly easy to understand. If you are married and have a family that relies on you to provide an income, what would they do if you died and that income stopped? Aside from the obvious emotional trauma, money would be tight, mortgage instalments would go unpaid, and foreclosure and bankruptcy would loom.

By purchasing life insurance you are able to use the cash benefit to pay off your mortgage debt entirely, pay off the portion supported by the now deceased spouse or use interest earned on the benefit to pay the monthly instalment.

Mortgage life insurance is typically bought on a Joint First to Die basis, this means that two people, usually spouses, are insured under one contract. The first person to die triggers the death benefit, which is payable to the survivor. After the first death the contract ends. Personally I don’t like these types of policies for several reasons listed below, I prefer to always use two individual policies.

· They don’t provide any real cost savings over two separate policies.

· They can be cumbersome to split in the event of a marriage breakdown.

· Some policies do not pay out double if both insured die in a “joint disaster” such as a car crash or plane crash.

Life Insurance also comes in several different term lengths. For the purposes of this discussion I won’t get into permanent insurance. Policies typically have a rate guarantee based on either 10 or 20 years, flexible policies are also available which can extend the rate guarantee to 35 or 40 years. The longer the rate guarantee the higher the monthly premium, though longer term policies are typically cheaper in the long run. Two back to back 10 year terms typically cost about 33% more than a single 20 year term. The decision to go with a 10 year or 20 year policy often comes down to a matter of cash flow.

When looking for life insurance, always ask the sales person if they are a broker or if they are affiliated with a specific company. Investors Group and Freedom 55 are examples of “captive agents” they can only sell IG or F55 products, even if they are not the best price or fit for the client. A broker is your best bet to get the best deal, brokers use a software program called LifeGuide which provides a list of all the available rates for all the insurance companies in Canada. Ask to see a printout of the top 10 companies, and ask why he is recommending the company he has chosen for you.

Brokers won’t always recommend the cheapest company all the time, and there is usually a good reason for this, either contracting, poor past experience, poor contract wording etc. We are paid by commission so there is a financial incentive to sell a more expensive policy as it will pad our wallets. Some companies also pay more than others, that shouldn’t be the only reason the broker chooses that company. We are also required to disclose how we get paid, by commission, but we do not have to tell you how much we get paid, unless you ask. As long as you are dealing with a reputable broker you shouldn’t have much to worry about.

I am happy to provide the inside scoop on the insurance industry, if anyone has any comments or questions about the life insurance industry post in the comments.

Rob Reynolds

Partner / Group Accounts Manager

HMR Employee Benefits Ltd

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.