GUIDE TO INSURANCE: Weighing mortgage creditor life insurance
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08/04/2010 10:00:00 AM
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Up until a couple of years ago, Gord McCallum of First Foundation Residential Mortgages in Edmonton says he was hesitant to offer his clients creditor mortgage life insurance. It wasn't that he didn't believe in insurance or didn't want to provide his clients options for coverage. It's that many policies, as he puts it, "left a lot to be desired."
The problem we've had is that many creditor life insurance policies can be limited in a lot of ways - not transferrable from lender to lender or from property to property," says McCallum. "We also found that most policies are underwritten at the time of the claim rather than at the time of application."
McCallum's concerns are not new - many consumer complaints about mortgage creditor life insurance policies come up as soon as you do a Google search on the topic. The CBC's consumer advocacy show, MarketPlace, also did an expos‚ on it in February 2008, focusing on the pitfalls of post-claim underwriting (also known as how an insurer will look for ways not to pay out a policy.)
But there are some good things to be said about mortgage creditor life insurance, particularly policies that come from third-party providers or insurance companies as opposed to financial institutions. It's also a good way for brokers to offer clients more of a "one-stop" service, especially because a licence isn't needed to sell creditor life insurance (the same can't be said for term life insurance) and because it can offer clients immediate protection. And there is a referral fee for brokers who direct clients to the policy-providing company.
Almost two years ago, McCallum decided he wanted to make a more concerted effort to offer the insurance to his clients, even if it was just a starting point for them to explore other types of coverage.
"I had a week where I heard three stories from three close friends about claims and that really got me thinking about trying to get something in place for our clients," says McCallum, who now offers policies through Mortgage Protection Plan.
Lynn Moroz, a Calgary-based mortgage and life insurance broker, also saw the value of life insurance first-hand when a client died suddenly in her home in 2007, just after she had put a policy in place for him.
"A lot of mortgage brokers aren't comfortable like they should be explaining life insurance, but when you have someone die, it changes things. People listen to you," she says.
Both McCallum's and Moroz's experiences illustrate the sentiment of many brokers toward mortgage creditor life insurance - the desire to offer clients some level of protection, but not in the form of a lacking or restrictive policy. Fortunately, both have found a balance they're comfortable with.
Why it's important
Mortgage creditor life insurance is a policy that pays off the balance of a mortgage to a lender upon the death of a person listed on the mortgage. It differs from term life insurance in a number of ways, most notably in that it pays out the lender instead of a beneficiary and it's easier to obtain upfront because there are no health checks beforehand (the flip side is the aforementioned post-claim underwriting).
"The creditor life insurance product is always tied to the mortgage, so it's really designed to protect the lender more so than it is to protect the client," says Paolo Abate, director of financial services at FC Financial. "Also, if a client does make a successful claim, they have no choice as to where the money goes and they may have other debts besides the mortgage."
Abate is one of many people who argue that term life insurance provides more effective coverage than creditor life insurance for a lower price to borrowers. Moroz, who is licensed to offer term life insurance, agrees with this argument, but says there is still a place for mortgage creditor life insurance and thinks it's a smart idea for mortgage brokers to offer it to their clients.
"If customers aren't pushed and followed up on, they might never get around to talking to a life insurance agent and then they walk away from a mortgage office underinsured," says Moroz. "So mortgage brokers are really doing the right thing by starting them out on coverage and then it's the clients' onus to get their own term life insurance in place."
For John Bargis, mortgage agent and vice-president of Mortgage Edge in Richmond Hill, Ont., offering creditor life insurance is an important step in serving clients. He also points out that if a broker firm offers an insurance product but doesn't mention it to clients during the mortgage process, the clients could come back and sue for a potential liability.
"The standard in the industry is that you do offer it," says Bargis, adding that with creditor life insurance, clients can either be covered from the day of mortgage application or the day the funds are advanced from the lender, which means the coverage starts right away.
This is a feature of creditor life insurance that McCallum is also a fan of.
"We use Mortgage Protection Plan and with it we can have coverage in place before the mortgage funds and that's been helpful because sometimes a term life insurance policy takes more time to get in place," he says, adding if the MPP coverage is cancelled within the first 60 days, a client's premiums are refunded. "It's just good business practice to offer some form of coverage and it can act as a stop-gap until a client has time to make other arrangements with a professional."
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