Peter Boys, Boys Financial Services

Creditor Life Insurance – Value or Rip-off?

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A death claim we handled for a client recently provided me with real evidence that creditor life insurance is a crap shot. Banks, finance companies, car dealers, etc. offer creditor life insurance purporting to pay off the loan balance in the event of premature death of a borrower. The borrower answers some basic medical questions, agrees to pay the premium and signs the form. Most don’t require underwriting.

The client had chosen the life coverage option on their farm and operating loans at two different lenders, supposedly to cover the balance owing. Neither one paid the death claims, the excuse being nondisclosure of a pre-existing medical condition.

Their premiums were refunded, but that was a far cry from covering the outstanding loans. The sad lesson the family learned is, although creditor life insurance is simple to apply for, it has many pitfalls compared to personally owned coverage that is underwritten and approved before it is issued, and that they own and have full control of.

By way of comparison, the insurance company we represented paid out a substantial death claim three months after the claim was made, and we delivered tax-free cheques to the grieving family.

Personally, I always decline creditor life insurance, as I want to control the process, not have the lender be the beneficiary of all the proceeds. Consider the first pitfall, which is that creditor insurance plans only pay off the outstanding loan balance. So for a couple, if one partner dies prematurely, the loan is paid off but the survivor is no longer covered.

This begs the question; is creditor life insurance worth having? In my opinion, creditor plans do not offer good value, a sentiment echoed by CBC Marketplace and consumer advocate groups. When comparing statistics, creditor plans pay out an average of 40% of premiums taken in verses 90% for life insurance companies. Another serious issue is the loss of all coverage once the loan is paid off.

CBC’s Marketplace has a telling YouTube video about the pitfalls with mortgage insurance. Watch it now. One of the biggest beefs is, once your mortgage or loan is paid off, you have nothing to show for all those premiums you paid.

So is creditor life coverage a good fit for you? In my opinion, if you qualify medically for personally-owned coverage that covers your debts and provides additional money to your family, then most likely not. If you don’t qualify medically, there are companies who insure high risk cases, however the amount of coverage is usually low and premiums are high.

When a business partner of mine was killed, 30 days later we had a $1 million cheque from the insurance company. I know how it feels to have cash available to pay the widow for the deceased partner’s shares. I shudder to think what would have happened if we had relied on creditor life insurance with our bank!

As an 18-year financial industry veteran, I sleep soundly at night knowing that when I deliver a policy to a client, their family, business partners or employees are protected. Having delivered over a million dollars of death claims so far this year reinforces the value that I bring to clients when disaster strikes.

There’s a reason the big banks make so much profit, because borrowers don’t take the time to research the alternatives. Professional life insurance brokers offer products that can provide better value. Coverage that is medically underwritten and approved is unquestionably better than the crap shot that creditor coverage exposes people to at the worst time, the death of a loved one

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