A bank or financial institution issued mortgage insurance policy is underwritten at the time of claim! Not when it is applied for!
In addition, the questions associated with the application are very broad; which allows for potential claim denial.
In some instances the bank or financial institution has never forwarded the application to the insurer and therefore there was no insurance coverage even though the bank collected the premiums.
You may become uninsurable prior to renewal! A new policy is applied for when the mortgage is renewed at the end of the term (even if you use the same institution). You may even be issued a policy on renewal but it is worthless
WHY YOU SHOULD OWN YOUR OWN INSURANCE!
1- Definitely Covered
You are insured for the Full Value of the insurance policy when it is delivered and you have accepted it. It is underwritten when the policy is issued. You are guaranteed the amount insured unless there was a fraudulent misrepresentation on your part.
2- Guaranteed Renewable
Upon expiration of the term, you are guaranteed to be able to renew the insurance policy without medical requirements at the amount stated in the policy, at the time of issue. Even if you have a terminal illness; you can renew your insurance!
3- You Control The Policy NOT The Bank
Your survivor may not wish to pay off the mortgage with the proceeds. There may be other expenses more pressing or more importantly in the case of a terminal illness up to 50% of the face amount can be used for medical expenses or to fulfill the “bucket list”.
4- Level Amount of Insurance vs. Reducing Mortgage Insurance
The policy can be a level amount instead of the reducing amount provided by banks, etc. In my experience people end up needing more insurance until they reach a certain age. In fact you may add a rider to the policy guaranteeing you to be able to purchase more insurance without evidence of insurability.
This issue was discussed in Legally Speaking 193 in the case of a couple who had insured a five year term mortgage, which they renewed for three consecutive five-year periods.
The couple had to complete a new application for insurance at each renewal and, by the third renewal; the husband had been diagnosed with cancer. As a result of a misunderstanding of the time periods expressed in the application, the husband innocently represented that he had not been diagnosed with cancer.
The insurer refused to pay, stating that the insurance would not have been renewed if the application had been correctly answered.
A somewhat similar case tried in 2001 reached a different result to the benefit of the surviving spouse. A couple insured their lives to cover the repayment of a mortgage with a term of 12 months.
They were unable to get insurance when they applied to renew the term because the wife had been diagnosed with cancer. The mortgage fell into arrears; the lender foreclosed and then sued the husband for a deficiency of approximately $144,000.
The husband’s defence was that the mortgage company representative had failed to clearly inform them of the important provisions of the insurance policy they purchased.
Although the representative discussed longer terms for the repayment of the mortgage, he did not make them ware that if they chose a 12-month term they would have to reapply and re-qualify for insurance.
They were denied the opportunity of considering other alternatives, such as a longer term, whole life insurance or another mortgage company, because they were not made aware that the wife’s cancer would disqualify them.
While the judge accepted this defence, he found the husband to be contributorily negligent for failing to ask questions or read the insurance policy. That meant that the husband had to pay 50 per cent of the mortgage company’s claim.
In many cases, even though consumers provide information about their state of health and other pertinent details when applying to the bank, that information is frequently not forwarded to the insurers until a claim is filed.
In this case, a couple from the Eastern Townships who applied for mortgage insurance when they applied for a mortgage with the National Bank of Canada, included in their declaration that the woman was undergoing cancer treatment.
The couple paid insurance premium until the woman’s death 22 months later. But the insurance company rejected the mortgage-insurance claims filed after her death, saying that the woman had not been insurable from the outset, even though the bank had issued a policy.
Contact me to make sure this doesn’t happen to you!