Banks know that the financial weight of a mortgage can scare people into thinking about what happens if they die suddenly, or develop a health condition that prevents them from working.
That’s why they make this sales pitch to their mortgage customers: Buy our life, disability and/or critical illness insurance to protect you and your loved ones if you can’t pay your mortgage. You should definitely consider insurance like this, but not the kind your bank sells. Instead, buy it from an insurance company.
Several reasons to not to buy bank mortgage insurance can be drawn from the experience of personal injury lawyer Nainesh Kotak. Mr. Kotak gets called by people who bought mortgage life, disability or CI insurance from a bank and had their claims denied.
A big reason for these denials is that only cursory attention is made to your medical background during the sales process by banks. “They rely solely on six or seven questions that are quite confusing, or they’re quite broad,” Mr. Kotak said. “So, there’s a lot of room for denied claims.”
How much insurance do I really need?
CI and disability claims can be denied when an insurer decide the medical issue in question existed before you bought coverage. With a traditional insurer, a detailed questionnaire must be completed before coverage is set, and a medical exam may be required as well. No insurance offers guaranteed payouts when you make a claim, but Mr. Kotak believes you have a better chance of success when dealing directly with an insurance company and not your bank.
Another reason cited by Mr. Kotak for passing on bank-sold mortgage insurance is that the money paid out in a successful claim goes back to the bank to cover your mortgage. You don’t have the flexibility to use the money however you choose, as you would with a policy from an insurance company.
Also, the premiums for mortgage insurance from a bank stay level, even as the balance owing on your mortgage declines. When you buy a policy from an insurance company, you choose a level of coverage that remains constant. Mr. Kotak said his research has found that the cost of coverage from a bank or an insurance company are comparable.
Term life insurance, CI and disability are widely available from life and health insurance companies, and comparative quotes can be found online. Mr. Kotak said banks selling insurance have customers in a vulnerable spot. They’ve just taken on a big debt and are offered a way to protect their families by buying coverage.
“People will go and do it,” Mr. Kotak said. “But I don’t think it’s a wise investment.”
Subscribe to Carrick on Money
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob’s personal finance reading list
Where we stand on wealth
A ranking of countries by wealth per person, with Canada in eighth spot. That’s behind only the United States among member of the G7 group of industrialized countries.
Mortgage reality check
A look at the affordability of mortgages in cities across the country based on median household incomes. Edmonton jumps out for affordability, Vancouver is worse than you think.
Best – and worst – for mobile banking
I now do about two-thirds of my banking and payments on my mobile phone. The reason is that mobile apps are where financial companies are putting their best efforts in providing a great platform for managing your money and paying for purchases. To find out how your bank or credit union’s mobile app stacks up, check out the latest Surviscor ranking. Winners and losers shown here.
‘Construction is a very unregulated business’
How a builder/renovator ripped off clients by taking money for construction work that wasn’t completed. The Better Business Bureau says the riskiest type of frauds in Canada in 2022 were home improvement and cryptocurrency scams.
Reader comment
This comment was generated by a recent newsletter about electric vehicle prices: “The appetite for Teslas is not just among the affluent. Just returned from Vancouver where nearly every second Uber was a Tesla. When I asked our driver about this, he said it because “you can get them in a few weeks of ordering one.” Try to get a Toyota, Hyundai, Volkswagen etc. and you are on a waiting list for 2025 (if you are lucky). Uber drivers are not affluent. They are driving Teslas because they are available, and the other manufacturers are not keeping up with the demand. Another interesting thing he told us is there are no options on Teslas because they come “fully loaded” with every possible option. He said if you do go to buy a different brand, you find you need to add on options and they end up being close to the same price as a Tesla.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Tools, Explainers, Guides and Charts
Answers to common questions asked by ex-pat Canadian investors about dealing with their investment company back in Canada.
The Money-Free Zone
So, I listened to the new Rolling Stones album, Hackney Diamonds. I liked the cut with Lady Gaga and Stevie Wonder, Sweet Sounds of Heaven, but my overall reaction was a shrug. Hackney Diamonds is OK, but why bother when there’s so much previous Stones greatness to hear? Not just the big hits, but quiet gems like Let It Loose from Exile on Main Street. Hot take: The most overrated Stones song is Start Me Up.
On social media
An insolvency trustee: “Three people I spoke to this week are giving up their cars that are costing them a fortune.”
What I’ve been writing about
– Amid stock and bond market volatility, the GIC outlook could hardly be brighter
– Looking past high interest rates at the next big risk to your personal finances
– Cue the eye-roll: Two-thirds of Canadians choose the word ‘saver’ to describe their main money personality
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Why millennials and Gen Z are Alberta-bound for a more affordable life • Rising interest rates brought pain for new homeowners – and opportunity for house hunters • Why more Canadians are choosing to be childfree or delay parenthood • Love in the time of inflation: How to manage rising costs when dating • You're not bad at money – you're suffering from money shame • Retirement might look different for Gen Z and millennials. Here's how to plan for it • Recession-beating tips for the job market, housing, investing and the cost of life • Is the middle class dead for millennials and Gen Z?
- ✔️ The housing file: A house isn’t special. Get your head straight about the reality of home ownership • The good, the sad and the unaffordable: Saving for a home downpayment in Canada’s big cities • Property taxes are popping in some cities – how worried should you be about other tax hikes? • Our other real-estate problem – people have too much wealth tied up in houses • Borrowers and savers, here’s how to time the eventual rollback of interest rates
- 📈 Investing: Canada's top digital broker is TD Direct Investing, with an assist from the TD Easy Trade app • 2023 Globe and Mail ETF buyer's guide part one: Canadian equity ETFs • For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio • Yes, there is risk in Canadian bank deposits for the unwary and complacent • CDIC covers bank deposits, but who protects your investments if your broker goes bust? • Answers to your questions about the low-risk ETF paying almost 5% • Happy fifth birthday to one of the all-time best investing products for everyday people • An investing strategy that wins cleanly over the long term by outperforming in bad years like 2022
- 💰 Your money: Mortgage holders, savers and GIC investors, it’s time to change your thinking on interest rates • How much debt is each generation of Canadians carrying, and how do you compare? • For the sake of their financial futures, young people should leave Toronto and Vancouver • This practical new spin on a savings account might just peel you away from your big bank • Rental fraud grows amid rise in fake, falsified tenant applications • Are Canadians worse off financially now than in the 1980s? • From groceries to auto loans, here’s how much more it costs to live right now • When saving for retirement, should you change your asset mix over the course of your career? • Do retirement income needs always rise alongside inflation? Not necessarily • When the bank suggests you lock in your variable rate mortgage, it has an angle
Rob Carrick