Some insurance policies contain a pre-existing condition (Pre-ex) clause. It means that if you have a medical condition when you acquire the insurance and it eventually causes your death, the insurer will not pay. Known or unknown cause. If you acquire insurance with such a clause you might not be covered.
We have all seen stories of bank loan insurance that did not pay off. That is the kind of thing that happens when the insurer does their underwriting after they see a claim. Insurers are not stupid. They know underwriting is expensive so some think why pay for it for all those people who will live or can El the policy? It works for them but not for the client.
Prudent people buy insurance from insurers who do their underwriting before they issue the policy.
Aside from this deal breaker, creditor group insurance, has other defects.
- It is not portable. If you move your mortgage or business loan to another institution, your coverage disappears. Not a problem unless you have become uninsurable in the interval.
- There is no guarantee of offering. The insurer can terminate the coverage on notice to the bank. They need not tell you.
- There is no guarantee of pricing. I suppose the bank could change carriers if one got greedy, but they have little incentive to do so.
- You cannot keep it forever. It all terminates by age 70 and some earlier.
- If there is a claim and if they pay, you have no control over what happens to the money. Maybe paying off a low rate mortgage five years from now would not be your preferred option.
- There is no advice element. There is no effort to fit it with other plans or other financial assets or liabilities.
Given all that, you would expect it to be more convenient and less expensive. You would, of course, be wrong.
It’s possible it is more convenient, at least when you acquire it. Maybe less so if you have a claim. It is not cheaper. It is not even close to being cheaper. In some bands it can cost twice as much as individually owned coverage. I have seen a case where a business owner replaced bank offered insurance on his loan with individual coverage for a saving in excess of $10,000 per year. All of the other advantages of individually owned coverage came to him free. Fairly large loan.
Avoid insurance poor. That happens when you pay too much or have the wrong coverage when it comes to a claim. One kind of wrong coverage is the one that might not pay. If you need the money then why would you take the chance of not getting it.
Think it through.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.