Understanding Post-Claim Underwriting in Canada: What You Need to Know

When considering mortgage insurance in Canada, one crucial aspect to be aware of is post-claim underwriting. While it may sound like a technical term, understanding how it works can mean the difference between your family receiving financial support or being left with nothing after a tragedy. Mortgage insurance offered through banks and lenders is typically classified as creditor insurance, which is governed by separate regulations than individually underwritten life insurance policies.

What is Post-Claim Underwriting?

Post-claim underwriting is a process where an insurance provider evaluates your eligibility for coverage after you file a claim. This differs from traditional underwriting, where all medical and eligibility assessments are completed upfront before the policy is issued.

For example:

• In a typical term life insurance policy, your health and eligibility are assessed thoroughly during the application process. Once approved, the policy is guaranteed, and claims cannot be denied after the initial contestability period (usually two years).

• With post-claim underwriting, the insurer doesn’t complete a full assessment until after a claim is submitted. If they discover a discrepancy, such as a pre-existing medical condition, they can deny the claim entirely.

Learn more about the underwriting processes on Wikipedia.

How Does Post-Claim Underwriting Work?

Here’s a simplified step-by-step process:

1. Policy Issuance:

   • You’re offered mortgage insurance during your mortgage approval process.

   • You check a box to accept coverage, often without providing detailed medical information.

2. Premium Payments:

   • You pay regular premiums for the coverage, assuming the policy will protect your family if the worst happens.

3. Claim Submission:

   • After the insured passes away, a claim is submitted to the insurance provider.

4. Underwriting After the Fact:

   • The insurer begins a thorough review of the insured’s medical history and application.

   • If any discrepancies are found (e.g., an undisclosed pre-existing condition), the claim may be denied.

   • We have had several people come to us over the years who have had this very thing happen, in BC and Alberta. It is a very difficult process while you are grieving to have to address this. 

Why is Post-Claim Underwriting Problematic?

1. Uncertainty for Families:

   • Your loved ones may assume they’re protected, only to discover the policy won’t pay out due to post-claim underwriting.

2. Lack of Transparency:

   • Banks and lenders often fail to explain this process clearly when offering mortgage insurance. Most people don’t realize their eligibility will be determined after a claim.

3. High Risk of Denial:

   • According to publicly reported industry studies, some forms of creditor insurance - including mortgage insurance - have shown higher claim denial rates compared to individually underwritten life insurance.

4. False Sense of Security:

   • Borrowers often believe they’ve secured peace of mind by checking a box, unaware of the risks.

How Did Post-Claim Underwriting Become Common?

Post-claim underwriting became a standard feature of creditor insurance, including mortgage insurance, due to its convenience for lenders and insurers. Unlike independently underwritten policies, creditor insurance is designed to minimize friction at the point of sale, allowing borrowers to quickly opt in without extensive paperwork or medical exams.

The introduction of lender protection insurance in Canada can be traced back to changes in the Bank Act. On October 12, 2011, the Regulations Amending the Insurance Business (Banks and …) came into effect. These regulations allowed Canadian banks to sell life insurance products, including mortgage insurance, under specific conditions.

The amendments aimed to:

• Tie Insurance to Core Banking Services: Banks were restricted to promoting insurance products directly related to their core business, such as creditor insurance.

• Prevent Unauthorized Promotions: Banks were prohibited from promoting non-related insurance products on their web pages or through unauthorized channels.

For more details, you can refer to the official legislation in the Canada Gazette.

How to Avoid the Risks of Post-Claim Underwriting

The best way to protect your family and avoid the pitfalls of post-claim underwriting is to choose independently underwritten insurance policies. Here’s why:

1. Upfront Underwriting:

   • Your health and eligibility are evaluated thoroughly when you apply, ensuring the Insurer has satisfied themselves of all the details.

2. Guaranteed Payouts:

   • After the standard two-year contestability period, claims cannot be denied unless fraud is involved.

3. More Flexibility:

   • Independently underwritten policies often offer additional benefits, such as the ability to designate beneficiaries or take the coverage with you if you refinance your mortgage.

Conclusion: Protect Your Family with the Right Policy

Post-claim underwriting may seem convenient during the mortgage approval process, but its risks outweigh the benefits. Understanding this process and exploring alternative insurance options can ensure your family is truly protected.

If you’ve already checked the box for lender-provided mortgage insurance, it’s not too late to explore better options. Book a call with one of our licensed professionals today to learn more about policies that prioritize your family’s needs.

Click Here To Book Your Call Now

Click here to learn about Lender Protection Insurance and why it can leave your family unprotected.

Discover the difference between lender-protection insurance and term life insurance here.

Disclaimer: This content is for informational purposes only and should not be considered financial, tax, or legal advice. Independent Financial Broker makes no guarantees about the accuracy, completeness, or applicability of the strategies discussed. Always consult a licensed professional before making financial decisions.

Shane Laderoute is a licensed Life and Accident & Sickness insurance advisor in BC, operating under Aurora Capital Partners.