Dangers of creditor insurance

It is common for individuals to carry bank/creditor insurance to cover their mortgage or debt. Banks or lenders may require individuals to carry some form of life or disability insurance in order to protect the lender in the event of the individual passing away unexpectedly. Often, the easy option is for the individual to secure creditor insurance, mostly because this is what is immediately offered to the individual at the time of securing the loan. Making this decision more inviting, creditor insurance is incredibly easy to apply for. 

The steps involve completing a simple form that asks a few general questions on health and lifestyle and, if answered in a preferred manner, insurance is approved on the spot.

In order to provide immediate approval, creditors provide their clients with post-death underwriting. Only when a claim is made due to an unexpected death does the bank’s insurer review the client’s medical history to determine whether the client answered all the questions honestly in their application. Small oversights, such as reporting a time you had an elevated blood pressure reading, could result in your claim being denied. Even more concerning is that if you are deceased, your family may have difficulty disproving the insurer’s claims of fraudulent misrepresentation.

When reviewing whether you want to consider creditor insurance over traditional life insurance, there are other concerns to keep in mind. 

Cost
Does your creditor insurance cost more than traditional term-life insurance? Over time, as coverage continues to protect a reducing loan amount, will premiums go down as the death benefit goes down? With traditional term insurance your premiums will reduce only if you choose to reduce the death benefit. Thus, as your loan reduces and the death benefit goes down, so too will your premiums. 

Beneficiary
With creditor insurance, the beneficiary is always the bank, not a member of your family. However, with traditional term insurance, you may have the choice to have your family named as primary beneficiary, allowing them to decide how best to manage any outstanding loans or debt.  

Changing lenders
If you were to sell your home and purchase a new home or decide to change lenders due to competitive lending rates, will your creditor insurance need to be reset? Will coverage then be reset at a higher cost due to increasing age? Further, if your health changes, will your current insurance accommodate a new lender, or will you be locked in with your current lender or risk having no coverage? With traditional term insurance, you have options to build your coverage, regardless of your lender, to suit your long-term needs and at competitive rates. 

Service and support
Individuals selling creditor insurance typically do not specialize in insurance products. It is also likely that the lender’s salespeople are unlicensed and ill-equipped to properly advise clients about the legalities of life insurance. At Doctors of BC, life insurance recommendations are done by licensed, experienced advisors who offer a range of products backed by quality insurers.

To schedule an appointment with any of our licensed, noncommissioned insurance advisors, visit www.doctorsofbc.ca or contact a Doctors of BC insurance administrator at 604 638-7914, 1 800 665-2262 (x7914), or insurance@doctorsofbc.ca.
—Renee Brickner, BSc, EMBA
Doctors of BC Insurance Advisor

Renee Bricker. Dangers of creditor insurance. BCMJ, Vol. 59, No. 6, July, August, 2017, Page(s) 322 - News.



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