Insurance risks

Although the purpose of purchasing insurance is to mitigate your own risk of loss, if not purchased carefully there are life insurance products that carry their own risk. The following information is intended to help you understand some of the risks that are inherent with certain types of insurance. This doesn’t necessarily make these bad products. It simply means that these products should be purchased with a certain level of caution regarding whether they are the right products for your own situation.


Mortgage/Debt Insurance

Mortgage insurance is the insurance that the bank offers you when you take out a mortgage. Similar insurance may also be offered on other loans as well. This insurance is intended to protect the bank, not you. The bank is the owner of the policy as well as the sole beneficiary. Upon death, your debt will be fully paid off. However, this means that your heirs have no control over how these insurance proceeds are used. There may be other financial issues that are more immediate, in their view, than the debt repayment.

Mortgage/Debt insurance is a decreasing insurance amount. As you pay off your debt and the outstanding amount decreases, so does the amount of your insurance. Your premiums, however, do not decrease to coincide with the reduction of coverage.

The biggest risk with this type of insurance is that the coverage is not portable should you refinance your mortgage or move the debt to another institution. You will need to apply for new coverage. If your health has deteriorated and you are no longer insurable, you will lose your insurance protection or be forced to stay with your original lender.

Another risk with this type of protection is that very little medical underwriting is done at the time of issue, usually only a few medical questions are asked. The insurance company will investigate your health in detail at the time that a claim is made. While some people may see this as an advantage, know this…the more information the insurance company has at the time that they agree to insure you, the more confident you can be that the claim, when it is made, will be paid with no delays.

When would you prefer to prove to the insurance company that you’re healthy, while you’re alive or after your death?

A personal insurance plan, outside of the bank, gives you more control over your coverage and the freedom to move or refinance your debt without the risk of losing this valuable protection.


Vanishing Premiums

Whole Life and Universal Life each have a cash element. This cash can sometimes be utilized to shorten the length of time that you have to pay your premium. Remember the Vanishing Premium class action suits in the early 1990’s? These were the result of aggressive assumptions on the investment element of Whole Life products. When the insurance companies couldn’t actually meet those assumptions, policyowners who thought that they could stop paying premiums after a specific (not contractually guaranteed) number of years were told that they would have to continue to pay. So while it may be tempting to pay your policies up early, this non-guaranteed feature is not without risk.


Group Life Insurance

If you’re working, you may have life insurance coverage through your employer sponsored group plan. Most group life insurance policies provide only a limited amount of coverage. Some group plans will allow you to purchase “optional” insurance amounts by providing proof of good health. Optional life insurance is an amount of insurance over and above the amount that your employer provides and for which you pay the premium (usually through payroll deduction). If you require additional life insurance protection, it is wise to price other products. You may be able to find less expensive and better quality coverage.

Although Group Life Insurance is beneficial due to its low cost and absence of medical requirements, Group coverage does not offer the level of control, portability, or choices that can be obtained with an individual life insurance policy.

  • You are insured only for as long as you are part of the group. If you leave or retire, you may lose your coverage.
  • Some group plans will allow you to convert your insurance to an individual plan if you leave your employer. However, conversion is usually to a term policy that will end at age 65 and at very expensive rates, since no proof of good health may have ever been required.
  • Your employer can change or cancel the coverage at any time. This could leave you and your family in the unfavourable position of not having any life insurance protection.
While Optional life insurance will provide you with additional protection over and above what your employer provides, it is still part of your group insurance and, therefore, subject to the same pitfalls.

To learn more about CBIA’s Group Protection plan click here.