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Be up-front from the start

|Written By Alan Acton

Misrepresentations could invalidate bank-sponsored mortgage insurance.

Bank sponsored mortgage insurance is generally sold alongside new mortgages and mortgage renewals. After a mortgage is negotiated, a bank representative will usually ask the borrower if they would like to insure their mortgage in the event of death or illness.

Mortgage life insurance, also known as mortgage insurance or creditor insurance, is offered by most banks and lending institutions. It is a life insurance policy that pays the balance of a mortgage to the lending institution if the person listed on the mortgage passes away.

Essentially, the insurance provides a life insurance payout equal to your remaining debt. As the outstanding mortgage decreases, so does the insurance benefit. Conversely, the insurance premium remains constant through the life of the policy — resulting in the same monthly premium being paid for a reducing amount of coverage as the mortgage is paid down year after year. However, for your convenience, premiums can be added to your regular mortgage payment.

Once you make your decision to purchase this coverage, you fill in an application to the insurance company. The application asks for your name, age, and other identifying information. Typically, it also includes a couple of health-related questions. The intent of these questions is to obtain information necessary to establish the nature of your risk and acceptance. But it is these brief health related questions that has lead to a recent CBC Marketplace report suggesting this process may be problematic come claim time.

Failure by an applicant to provide accurate and complete personal information could invalidate your insurance coverage. Occasionally, an applicant may discover that a fact has been omitted or innocently misrepresented on the application. In that case, the insurance company should be notified immediately so that any necessary adjustment can be made. If such errors are discovered when a claim is submitted, the company’s action will depend on the nature of the misinformation. For example, if the age has been reported incorrectly, the insurance company will usually adjust the benefits accordingly and pay the claim.

However, if health status or other vital information has been misrepresented, the insurance company has the legal right to contest its validity on the grounds that information material to the risk has been held back or misrepresented. If it has been, the policy can be voided and premiums returned.

If you, like those in the CBC Marketplace report, are concerned that the insurance company could contest your policy, you may wish to purchase an individual life insurance policy instead. The “contestable period” under an individual life insurance policy is limited to the first two years of the policy. After the policy is in force for two years, the insurance company cannot contest it except in the case of fraud, that is, a deliberate misstatement of fact. An example of fraud is a smoker who declares himself/herself as a non-smoker in order to get a reduced premium.

Insuring one’s mortgage against premature death or sickness is a great idea. Life insurance is a “good faith” contract and requires full disclosure by the applicant and insurer. So, be up-front when answering the questions on your application form because withholding or misrepresenting information could make your policy null and void.

Just as you seek out expert advisers for other financial needs — bankers, financial planners, and the like — your choice of a life insurance agent is a key decision. Your life insurance agent plays an important role in the financial planning process by tailoring an insurance solution to your specific needs.

For more information on the CBC Marketplace program mentioned above, visit www.cbc.ca/marketplace/in_denial.

Alan Acton is a financial advisor in Ottawa and can be reached at alan.acton@raymondjames.ca. The opinions expressed are those of Alan Acton and not necessarily those of Raymond James Ltd. Statistics, data, and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. This document has been prepared to assist individuals with financial concepts and is for informational purposes only.

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