When you take out a mortgage or loan at the bank, your banker will ask if you want insurance coverage. Most customers make this decision very quickly, and with little information. But the decision about insurance is important. The good thing is, if you rushed through the decision at the time of signing papers, you have an opportunity to change it.
Here’s what I’ve seen through my experience at the bank; about half of customers have the appropriate insurance coverage for their loans, mortgages, or credit lines. The other half either don’t have an appropriate amount of coverage, they are paying too much for the coverage, or they are paying for coverage they don’t even qualify for anymore.
Here’s what you’ll find in the article:
- The type of coverage banks offer
- How insurance works for different types of loans
- Tips on when it makes sense to take the bank’s insurance
- How to save money on insurance coverage
Loan and mortgage insurance have features and coverage that make it different from a regular life insurance policy. When you buy a life insurance policy from an insurance company you typically pay a monthly amount for either a term insurance policy or a whole/universal life policy.
Term insurance provides a lump sum amount of insurance coverage for a specific period of time. If you should pass away while the coverage is in place, your beneficiary or your estate (if no beneficiary) will receive the lump sum of money. For example, you can buy $50,000 of term insurance for a 5 year term. It’s relatively inexpensive and the premium is based on your age and health. When the term is done, in this case 5 years, you can choose to cancel or renew the policy. If you renew it, the rate will be based on your current age so the premium will be higher.
Universal/Whole life insurance is an insurance policy with savings built in. It is also based on the amount and your health but rather than having a term, the insurance lasts until you cancel the policy or pass away and it gets paid out. Because it’s ongoing coverage, it costs more. The link below is a good resource for further information on insurance.
So how does insurance purchased from a company differ from loan and mortgage insurance? Loan or mortgage insurance is specific to a debt and covers only the balance of the debt. Banks also offer payment insurance coverage such as disability and job loss insurance. The costs and coverage works a bit different depending on the type of loan you have. First, let’s look at the different types of coverage.
WHAT TYPE OF INSURANCE DOES THE BANK OFFER?
Life insurance covers the full amount of your loan, line of credit, or mortgage. If you should pass away while you still have a balance owing on a loan the insurance pays the full balance. Why would you want this type of coverage? If there is a joint borrower on the loan, such as your partner, they will not be responsible to continue making the payments. But what if you are single? If there are no other borrowers the debt would be carried forward to be paid by your estate. If you don’t want this to happen, life insurance is a solution.
Critical illness insurance
Banks offer critical illness insurance as a supplement to life insurance. This means that if you take life insurance coverage on a loan or mortgage, you may also sign up for critical illness insurance. Critical illness insurance covers you if you are diagnosed with a critical illness specific to those listed in the terms of the insurance policy. Your debt would be paid in full should this happen.
Disability insurance is a form of payment insurance rather than being an insurance to pay off your balance. If you have disability insurance coverage and you are off work for a period of time due to injury or illness, the insurance will cover your loan or mortgage payments while you are off work.
Job Loss Insurance
Banks also offer Job loss insurance. If you are out of work for a period of time due to layoff or job elimination, your payments will be covered. Employment insurance covers the same scenario if you qualify so job loss insurance is a nice top up if you’re in an industry where this is a concern for you. Similar to the critical illness insurance, this is a supplemental coverage to disability insurance. This means you have to take the disability insurance if you want job loss insurance coverage. Because of the expense and specific nature of the coverage it should be restricted to those individuals who are in an industry where the likelihood of job loss is higher and if employment insurance coverage is not enough to supplement.
Now let’s look at different types of loans and how the insurance works for each one. Please note that for ALL Insurances you will be required to complete health questions and may need to provide medical information.
How Insurance Works for Different Loans
Life and Critical Illness
This insurance for mortgages covers the balance owing at the time of the claim. The premium for the coverage is set at the time you apply and is based on your age and the amount of the mortgage. The coverage lasts until you pay out your mortgage or you cancel the insurance. There is usually an age restriction as well, which means that the coverage will end at age 65 or 70 and at this time the premium will automatically stop. Insurance can be added or cancelled at anytime.
Pro – if you get a mortgage when you are young, the premiums are based on your current age and they will never change while you have your mortgage. Mortgage life and critical illness insurance coverage is also transferable if you get a new mortgage. This is an important feature if you have developed an illness since your previous mortgage and would no longer qualify for insurance.
Con – the amount of your insurance coverage keeps declining as your mortgage balance reduces. For example, if you take out a mortgage for $300,000 and you’re 28 years old, your monthly premiums would be around $27.00. So initially you’re paying $27 for $300,000 of coverage. It’s a pretty good deal. But as your mortgage balance declines, it’s not such a great deal. In the last few years of your mortgage you are paying the same premium for a small amount of coverage.
Disability and Job loss
This insurance covers your payment and is based on your age and the payment amount, including property taxes if they are part of your payment.
Pro – Having your payment covered if you are off work due to injury or illness, or due to a job loss reduces a lot of stress from your life and your budget. The nice thing with mortgages is that you can select insurance coverage for 50 -100% of your payment. This way, you can have a look at what your work might cover and just top up the difference. By topping up, you reduce the premium on your insurance, but still have the piece of mind that you have enough money between your work and bank coverage to make your payments.
Con – disability insurance can be costly for a large mortgage payment, especially if you don’t have some coverage through work and require 100% payment coverage. There are also restrictions for pre existing conditions. So if you are off work because of a recurring injury you likely will not receive insurance coverage. Job loss insurance is even more costly because you have to take the disability coverage and then pay an additional premium for job loss.
Disability and Job Loss Insurance does NOT provide coverage for any personal loans or mortgages if you are self-employed.
Loan insurances work similar to mortgage insurance, premiums are based on the same criteria, the premium won’t change while your loan is in place, and the amount of coverage reduces as the loan balance declines.
The main difference is that you can only choose coverage for the full amount. You will not have the option to cover only 50 or 60% of your payment. But, because the monthly payments are usually much lower than a mortgage payment, the insurance costs a lot less.
Pro – relatively cheap for a small, short term loan especially at a younger age. Insurance premiums will stay the same for the term of your loan. Loans up to $50,000 typically have automatic approval for the insurance.
Con – Disability and Job loss insurance can be expensive if the loan payment is large and you are older because there is no option to take anything other than 100% coverage.
Line of Credit Insurance
Insurance on credit lines works a bit different than for loans and mortgages because credit line balances will typically fluctuate. The premiums and coverage are based on your age and the balance of your credit line. If you set up a line of credit and opt in for the insurance coverage but never use the line of credit you will not be charged any premiums. If you draw $10,000, your premiums will be based on that amount and will reduce each month as you pay the credit line balance off.
Another important difference is that the premiums are automatically adjusted for your age. If you’re 25 years old when you take out the credit line, you will be quoted a cost based on your age at that time. If you use the line of credit when you’re 30-35 the cost of insurance will be adjusted for your higher age.
Pro – Automatic approval for amounts up to $50,000. Premiums are based on the balance of the credit line so you only pay if you use it. Relatively cheap insurance for young people.
Con – Premiums will automatically increase as you hit certain age brackets; age 30, 35, 40 etc. Life and Critical Illness insurance payout is based on an average balance rather than the actual balance of the credit line.
WHEN DOES IT MAKE SENSE TO TAKE THE BANK’S INSURANCE?
Mortgage Life and Critical Illness
This is a significant debt and if you have a family it makes sense to have life insurance coverage. Because of the declining amount of insurance on the mortgage it’s a good idea to look at outside term insurance in most cases. Term insurance through an insurance company is relatively cheap so shop around for a term policy that would cover the term of the mortgage- 20 or 25 year term. I think you’ll find it makes more sense than signing up for the bank’s insurance.
Mortgage Disability and Job Loss Insurance
The highest number of claims processed are for disability insurance and for that reason this is a Yes for me. A lot of people think they have good disability coverage at work but what they don’t realize is that often your work disability covers you for about 60% of your wage and often reduces after a six month period. I recommend reviewing what type of coverage you have at work first. Then top up for disability coverage to make sure you won’t fall short if you are off work for awhile. People have found themselves in terrible financial difficulties due to extended disabilities so this is important coverage to have. Normally, the coverage is for up to two years and there are clauses with regards to previous conditions etc. Be sure you read the fine print if you’re interested.
Overall, disability insurance makes sense when you’re taking on a new debt unless you have either really good coverage at work or a stash of money to tide you over if your income is reduced for a period of time.
On the other hand, job loss insurance is expensive and only a good option if you have concerns with your job stability.
Loan Life and Critical Illness Insurance
Loan insurance is pretty inexpensive when you are young so if you don’t have any insurance and you have a family then you should take the coverage; it’s not worth shopping for an extra insurance policy for $20,000 in coverage. If you are over 40 and the loan amount is large, best to shop for a term policy with an insurance company.
Loan Disability and Job Loss Insurance
As with Mortgage Disability insurance there are a large number of claims for loan disability. If you wouldn’t be able to afford your payment without your full paycheque then take the coverage. It’s not worth getting into a financial mess and loans are short term so overall the premiums are reasonable. Job loss insurance- same as for mortgages, it’s pretty expensive so take the coverage only if your worried about job instability.
Line of Credit Insurance
Pretty much the same rational as above for mortgage and loan insurance with one difference. I would say to take the insurance when you first sign up for the line of credit even if you don’t plan on using it. You won’t pay anything for it anyway. Once you start using it you can weigh the cost/benefit and if you think it’s too expensive later, then just cancel it. Here’s the advantage to doing this: If you take out a line of credit and sign up for the insurance and at the time you have no health conditions, you will be covered with no restrictions, even if you don’t use the credit line or pay any premiums. If later on you develop an illness that makes you uninsurable it doesn’t matter – you will still be covered because at the time you signed up you didn’t have the illness.
Make Sure to Have Insurance When….
- You are co-signing a loan. Always make sure the primary borrower has insurance coverage. Too bad if the premiums are high. You don’t want to have to be paying their debt off if something happens to them!
- If you have a builders mortgage – take insurance while the construction is in progress. Nothing worse than something happening when you have a half built home and your family is left with a debt and a half built house to deal with. You can decide on the final coverage later when the full mortgage draws down.
- If you are uncertain whether you want to take the insurance coverage on any mortgage or loan and you want time to shop around, Take the Coverage. You get a free 30 day look so you can cancel it after that if you find better coverage or decide you don’t need it.
MONEY SAVING TIPS
Shop around for term insurance for Life and Critical Illness coverage if you need $50,000 or more.
Cancel insurance if you don’t need it anymore or if you no longer qualify. When to cancel:
- For life and critical illness, as your balance reduces asses the need for coverage. When your mortgage/loan balance gets low – cancel and save your money.
- Disability or job loss – make sure you cancel this if you change jobs and have better disability coverage at work, if you change to self-employment, retire, or become unemployed for an extended period of time. The insurance only covers you if you are employed and you will need a statement from your employer to make a claim.
- Always check your work policy and use the reduced coverage feature for mortgage disability insurance.
- Personal Line of Credit – cancel this insurance when you get older unless you really need it, it gets too expensive over 50.
- Student Line of Credit – I’ve seen cases where student borrowers have signed up for and have been paying for disability insurance. Unless you are employed full time while in school (not likely) you typically do not qualify for and should not being paying for this insurance. You can add it later when you get a job.
Request to have your premium refunded if you have paid for insurance you no longer qualify for. Here are a few examples:
Sam took out a loan January of 2018 and signed up for disability and job loss coverage. January 2019 he started his own business and became self employed. At this time he opened a business account with his bank where he had the loan. September 2019 he got sick and could no longer carry on his business so he tried to make a claim for his disability and job loss insurance. He is self-employed so he is not eligible. Because he had updated his change of employment status when he opened his business account, the bank had a record that he was now self employed. Sam can request that his premiums since January be refunded because he was paying for insurance he wasn’t eligible for.
If you are a student and have been paying for disability coverage that you are not eligible for, ask for ALL of your premiums to be refunded.
READ THE INSURANCE CERTIFICATE!
ALL INSURANCE COVERAGE policies have a lot of fine print that include exclusions for pre existing conditions, and Disability and Job Loss have limits for the duration of payments and recurring disabilities. I know the certificate is long and boring, but understand what you are paying for.
And finally, as with all financial decisions, insurance is just one piece. Your financial advisor can help you feel confident that you have appropriate overall coverage.
I welcome your comments and questions, and please share this if you have found the information helpful.