#1 Mortgage Insurance is not life insurance
It is a very common assumption that when you buy your home and purchase mortgage life insurance from the bank or lender you and your family will be 100% protected if one of you should pass away. This is simply not the case; mortgage insurance is a type of credit or insurance that the banks offer and is not life insurance.
The pitfalls of mortgage insurance to look out for are:
- In most cases, mortgage life insurance costs more than life insurance offered through traditional insurance companies.
Death benefit proceeds are paid to the bank, not a name’s beneficiary.
- Death benefit proceeds are connected to the balance of the mortgage and therefore reduce over time…but your cost does not.
- Banks and lenders can withhold payment of death benefit proceeds if they feel that there was a medical condition that was not explained on the simplified form when the insured applied.
You can cancel mortgage life insurance with your bank or lender anytime without penalty or compromising your mortgage and replace it with traditional life insurance.
#2 Understanding the basics of life insurance
It is a very common assumption that life insurance contracts are made to protect insurance companies, this is simply not the case!
Having built insurance contracts in a past life, I am here to tell you that insurance contracts are built to protect the life of insured(s).
There are no penalties or costs to make any of the following changes to life insurance policies:
- Cancel
- Reduce the amount of insurance
- Change cost of insurance charges
- Add more insurance or riders to existing policies
- Add additional people to an existing policy
- Withdraw cash values (after a given time frame and depending on the type of policy)
The only contractual provisions that are set out to protect insurance companies are:
- Fraud or Material Miss Representation – this means that if an insured lies on an application during the initial insurance process and dies because of this lie or fraudulent act…the insurer has the right to refuse payment of the death proceeds but will in place of that repay the premiums that the insured paid into the policy.
- Act of War – if an insured dies or is injured as a result of a criminal offense or act or war, the inured reserves the right to withdraw or withhold payment until they investigate the reasons for this act.
- 2-year suicide and incontestability clause – in the first 2 years of the policy, if the insured dies due to an act if suicide or a medical condition that was not fully explained on the original application, the insurance company has the right to withdraw or withhold death benefit proceeds pending until they investigate the reasons for the death….if death proceeds are not paid out, most insurance companies will reimburse the premiums paid.
#3 Renewable and Convertible Term Insurance
In my 30 years in the insurance industry, I have come across this misunderstanding many times…term insurance is not permanent insurance. About 70% of the Canadian population owns some type of term insurance policy, and they still seem to a belief that this type of policy will pay out at any age. All term policies except for what we call a Term to 100 will eventually terminate if you let them renew long enough.
Although term policies say that the termination date is 80 or 85 it doesn’t mean the costs will remain the same until that point.
Renewing a term policy for another term period is almost never in a client’s best interest, the cost of renewing a term policy, is usually about 2 to4 times the cost of what a client can get on the open market by simple reapplying for new term insurance. This is almost always the case, even if there is an underlying health condition. Many people believe that they should not notify their advisor when their term policy is up for renewal if they have a health condition that has come about during their term policy period. This is not the case at all; insurance companies charge a very high cost for renewal because they are taking on a new term period without any medical knowledge from the client. So, their risk and costs associated with renewing a term policy are 100% and therefore they charge a huge mark up to renew.
The process of renewing a policy is automatic and if the client or advisor is not monitoring the renewal dates, it often happens that the client will get a large withdrawal to come out of their bank accounts, and as such not a pleasant surprise at all.
#4 Not Looking Around for New Policies
You should be shopping around for a new basic insurance policy every few years. In some instances – especially if certain circumstances have changed – you can save money by updating your policy or switching providers. Some insurance companies may even offer discounts based on things like where you work or where you went to college.
#5 Misunderstanding Your Policy
Make sure that you understand what your policy covers, under what circumstances it can be used and what you can still expect to pay out-of-pocket. Having a thorough understanding of your policy now means avoiding unwelcome surprises when it’s time to file a claim.
#6 Opting Into Group Life Insurance Automatically
If you choose to take advantage of your company’s group life insurance policy, remember that your rates aren’t locked in – they could go up. Consider any additional life insurance offerings provided through the workplace carefully before signing on. You should know exactly what you’re paying for, and if the premiums are worth the potential benefits in your particular situation.
