“If you want to test a man’s character, give him power.”

Abraham Lincoln

This article is based on the recent CBC program Market Place  that reviewed the approach of Canadian banks to Mortgage insurance.

Mortgage insurance: It seems like a responsible way to ensure your family will be cared for should anything happen to you and it fits easily into any budget. All you have to do is read the form, answer yes or no to a questionnaire about your health, then the bank employee shakes your hand and congratulates you on your wise choice. You don’t even have to go through any medical exams. Good decision.

Or is it?

Most people assume that once you fill out the health questionnaire and the bank starts to collect payments, you’ve qualified for the insurance. That’s the way it’s supposed to work, right?

It turns out that isn’t the way this insurance product works. When you complete the form, all you are really approved for is to pay the premium. You are not approved for coverage the way you are with traditional life insurance. Your application and your health are not actually reviewed until you file a claim, meaning, you don’t find out if you’re actually covered until something bad happens and you ask for the money, assuming you’re alive to ask. This practice is called post-claim underwriting.

“What the insurance industry is doing on these mortgage policies is foregoing all that expense, and only investigating the few that die,” says Jim Bullock, an insurance broker and expert witness in lawsuits. It costs them money for blood tests, urine tests or chest x-rays.

That’s good for the insurance companies but not so good for you. The questionnaires they provide are not consumer friendly. They are full of generalities that few people are knowledgeable enough to answer correctly. Bullock says mistakes are inevitable when filling out complex questionnaires. People forget about health issues that result in a doctor’s visit but turn out to be false alarms.

Consider the question, “Have you ever been tested for high blood pressure?” If you don’t have high blood pressure, you would very likely answer no, however, did you know a test for high blood pressure is simply the pressure cuff the doctor, as a matter of course, puts on your arm to test your blood pressure? Therefore, you have been tested and you may very well be disqualified – a definite reality check.

“These (questionnaires) are terrible,” says Bullock. “If they really wanted to develop the information correctly, they would break all these generalities in about thirty specific yes or no questions.”

Since the majority of the bank’s mortgage advisors are not licensed to sell insurance, they are unable to clarify or answer any questions you may have. Indeed, they are not objective advisors. They are paid to sell you the policy. Past bank mortgage advisors have come forward and admitted they were even coached by management to use a little psychology. For instance, if you refuse the insurance, they may, in a last ditch effort to get you to comply, say something along the lines of, “If you sign this waiver of refusal, you and your family will not be protected if something should happen to you.”

It seems bank management doesn’t find it unconscionable to induce a little anxiety in you while you are in a vulnerable state making a huge life decision.

And the banks? They are laughing all the way to – well, themselves. The major banks are making billions of dollars pushing mortgage insurance every year. The big three insurers, who provide mortgage insurance to Canada’s Big Five banks keep the disqualification rates a closely guarded secret. There is no way to even know the statistics on whether or not you will be successfully insured. Currently, there is very little consumer protection legislation with the exception of Alberta, which made it mandatory for anyone selling insurance to be licensed. The insurance companies fought that decision all the way to the Supreme Court.

Three more things you should know about mortgage insurance. It is more expensive compared with the same coverage using traditional life insurance. And they are less flexible. Most policies are tied to both the property and the bank, so if you move or switch to a different lender, your policy cancels.

If you pass away and you end up being disqualified for coverage by your mortgage insurance, at least the bank will give the premiums you paid back to your loved ones. It’s the absolute least they could do. A small consolation for your family who will have to deal with the unexpected burden of debt.

A qualified insurance professional would also disclose that you are purchasing a declining value product. Every mortgage payment you make pays off some of the original principal.  For example after 10 years, a policy for $250,000 at a 3.5% mortgage rate only has to pay out $174,888 if you actually qualify! Yet, your payment does not change to reflect this drop in value. Ironically, your very last mortgage insurance payment will be worth more than the payout.

Your professional financial adviser is aware of alternatives that will protect your family’s future responsibly.