Should You Own Creditor Life Insurance?
Posted on November 27, 2018
by Don Shaughnessy
Leave a Comment
Did you notice the trick question?
Many banks and some others offer life insurance protection for loans you have with them. That insurance is creditor group insurance and it is unusual for anyone to get a mortgage or other loan without the loan officer suggesting the purchase. The trick question is that you can’t own creditor life insurance. It is owned by the bank and either the bank or the carrier can terminate the group contract at any time and leave you without. If your health hadeteriorated, that could be a serious problem.
The question becomes “Should you have creditor life insurance?”
There are two possible answers. “No” and “Absolutely not!” There are many reasons:
- Control. Under a group plan the contract is between the carrier and the bank. You get a certificate of participation and have no rights other than those specified in the certificate. In an individual contract, you the owner have a binding contract with the carrier They cannot cancel your coverage. Most individual term policies offer meaningful options in addition to the coverage.
- Choose the beneficiary. It need not be the bank. You might prefer that if your mortgage is at a fixed low rate. Who would pay off a cheap loan if they could invest at a much higher rate until the loan matured?
- Change coverage level. You need not cover the entire loan if that pleases you. You may have other coverages that could help, or survivor’s plan could be too liquidate the asset and purchase something less expensive, perhaps in a new place.
- Pay annually instead of monthly. About 8% cheaper.
- Change banks and keep the coverage. If you become uninsurable for any reason, you may be trapped with a bank you do not prefer.
- No pre-existing condition clause. Pre-ex. Insurance companies do their underwriting at the beginning of the contract and if they cover you, they will stand by their initial assessment unless you intentionally lied or otherwise committed a fraudulent act. All policies have a two-year non-contestable clause. After two years, they have a difficult task to challenge a claim. Creditor group insurance claims are examined after the fact. If there were conditions at the time of issue that could have contributed to the death, they won’t pay. And you won’t find out until it’s too late.
Many people are under the illusion that this insurance is inexpensive. Given the defects, they are able to rationalize why it should be so. That illusion is quite costly.
It is wise to examine the pricing and contrast it with the price of individual term coverage. It depends a little on your age, gender and the bank you use, but in Canada the price is from 50% to 150% more with the bank. That difference is not huge in dollars for many people, but it is a bad habit to overlook easy savings and poor product.
The banks win here. You are already signing piles of paper and one more seems innocuous. The absence of a medical, just a few questions, seems a big advantage.
Comparatively, you would need to go to another office and answer many questions and likely have a paramedical nurse come to you home at your convenience to complete the process. Probably an hour or more in total.
- The time you invest to get individual coverage is a well paid hour or two.
- You know the coverage will be there if you pass away. No Pre-ex surprises.
- You control the amount, the coverage type, the beneficiary, and you pick up other valuable options.
- You could take the coverage with you if you wanted to do so and it continues if the bank makes a decision to no longer offer it.
- The coverage does not go down everytime you make a payment.
If you have credit lie insurance with your bank, you must as a responsible steward of your own affairs, make the change to individually owned coverage. Now!
I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.
In previous careers, I have been a partner in a large, international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 705-927-4770