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Lender Protection Insurance: What You Need to Know

If you live in BC or Alberta and have a mortgage, chances are your lender or Mortgage Broker on behalf of—RBC, TD, Scotiabank, BMO, or CIBC—offered you mortgage insurance. It might have seemed convenient at the time, just a checkbox during the approval process. But what you might not know is that these policies are a type of lender-protection insurance (creditor insurance). This means they primarily benefit the lender, not you or your family. These important differences should give you pause to think.

What is Lender Protection Insurance?

Lender Protection Insurance, commonly sold as mortgage insurance by Canadian banks, is a type of creditor insurance. It ensures the lender is paid the outstanding balance of your mortgage if you, the borrower, pass away. These policies have drawbacks, such as who the beneficiary is, decreasing payouts and post-claim underwriting, which most Canadians don’t fully understand:

1. The Lender is the Beneficiary:

   • The insurance payout goes directly to the bank to cover the remaining mortgage balance, not to your family.

   • This means your loved ones don’t receive any additional financial support beyond the paid-off mortgage.

2. Decreasing Payouts:

   • The coverage amount decreases as you pay down your mortgage, even though your premiums remain the same.

   • Essentially, you’re paying the same price for less coverage over time.

3. Post-Claim Underwriting:

   • Unlike traditional life insurance, lender protection insurance often involves post-claim underwriting. This means the insurer evaluates your eligibility after you file a claim.

   • If they discover discrepancies or pre-existing conditions, they may deny the claim altogether, leaving your family without support.

   • We have had several people reach out to us over the years to seek help for this exact issue. Unfortunately it was after they were denied the coverage. We had some good advice for them but it was not an easy process, especially while they were rightfully grieving.

How Did Lender Protection Insurance Begin in Canada?

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.

This regulatory framework solidified the role of banks in offering lender protection insurance as a standard add-on to mortgage agreements.

Why Does This Matter to You?

For many Canadians, lender protection insurance seems like an easy and logical choice. After all, who wouldn’t want to ensure their mortgage is paid off in case of unforeseen events? However, the reality is that this type of insurance has significant drawbacks:

• Limited Coverage: Your family only benefits indirectly by inheriting a mortgage-free home, but they receive no additional funds to cover other expenses.

• No Flexibility: You can’t transfer the policy if you refinance or move to another lender.

• Higher Risk of Denial: With post-claim underwriting, there’s a real possibility your family may not receive the intended benefit.

• The costs of both of these types of policies is typically the same.

What About Critical Illness and Disability Insurance?

Some lender protection insurance policies come bundled with Critical Illness and Disability Insurance options. They are of course a very sound thing to have, however you do not have to take the life insurance portion:

1. Critical Illness Insurance:

   • Covers a limited list of critical illnesses you may develop (e.g., cancer, heart attack, stroke).

   • The payout is tied to your mortgage balance and goes directly to the lender, not to you or your family.

   • Limited flexibility to cover other financial needs beyond the mortgage.

2. Disability Insurance:

   • Provides temporary payments to cover your mortgage if you become disabled and cannot work.

   • Payments only cover the mortgage and often include restrictive conditions and waiting periods before benefits begin.

Alternatives:

• Independently purchased critical illness and disability insurance policies often offer broader coverage and payouts that go directly to you, giving you more control over how the funds are used.

What Is A More Attractive Life Insurance Alternative?

Fortunately, there’s a better option: Proper Term Life Insurance. Unlike lender protection insurance, these policies are designed to prioritize your family’s needs:

1. Your Family is the Beneficiary:

   • The full face value of the policy is paid directly to your family, giving them the flexibility to use the funds as needed.

2. Guaranteed Coverage:

   • Once the policy is issued, underwriting is complete. After the standard two-year contestability period, the insurer cannot deny a claim unless fraud is or was involved.

3. Fixed Coverage Amount:

   • The payout amount remains the same throughout the term, even as your mortgage balance decreases. This is important because you spend the same amount of money both ways.

   • Put another way: As an example, You spend $120/month over a 20 year mortgage for $1,000,000.00 in Lender Protection Coverage for your spouse and you. Your friend spends the same amount per month for the same $1,000,000.00 of proper Term Life Insurance. Assuming the Post Claim Underwriting doesn't find anything: a claim is submitted on both policies after 15 years. Both mortgages have a balance of $250,000.00. Yours is paid off from the Lender Protection Coverage - You spent $18,000.00 in premiums, the home is now mortgage free for your family. Your friend spent the same $18,000.00 in premiums, his family can now choose to pay off the $250,000.00 mortgage, which they do, after considering moving for a while. Now they have a mortgage free home AND $750,000.00 on top of that. Both of you paid the EXACT SAME AMOUNT - $18,000.00 in premiums.  

4. Similar or Less Cost:

   • In many cases, independently underwritten life insurance offers better value for the same—or even lower—premiums.

Conclusion: Don’t Settle for Lender-First Protection

Lender Protection Insurance has become a transaction, done by checking a box. Is this information given to people before they check the box? Only you and the person selling it to you will know. Now you can clearly see where it falls short when it comes to protecting what matters most: your family. By understanding its limitations and exploring alternatives like independently underwritten life insurance, you can make a more informed decision about how to safeguard your loved ones.

If you’ve already checked the box for mortgage insurance without fully understanding its implications, you’re not alone. Book a call with one of our licensed insurance professionals today, to explore better options tailored to your needs.

Click these words to book a mortgage insurance consult with one of our licensed advisors today.

Click here to learn how post-claim underwriting works and why it can leave your family unprotected.

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