Insurance policies

August 15, 2019

Canadians have been described as among the most over-insured people on earth, we have all kinds of insurance policies, some of which turn out to have little value but a big cost but are expensive.  Take for instance mortgage insurance or accidental health insurance – both types of insurance have been known to deny coverage to insured parties after claims are made.  The denial may be based on factors that were, purportedly, not properly disclosed or signified when the policies were purchased. 

For example, a relative of mine severely injured his knee playing ball hockey.  He claimed insurance coverage for his mortgage and car loan – both were covered under a bank issued health care package and in each case the coverage was denied, and his premiums returned.   The insurance company contended that he had a pre-existing heart condition that was undisclosed on the original application questionnaire.  The thing is that he is a little overweight and had complained of chest pains to his doctor who recorded that he was worried about his heart.  The medical issue turned out to be stomach problems and nothing more to do with his heart than the knee injury he was claiming compensation for.

The insurance company looked for any excuse not to meet its obligation and used the complaint as an excuse not to pay out the claim.  Instead the insurance company returned his ten months worth of premiums.  Many people have had similar experiences or had friendly brokers who overlook moving infractions to get cheaper vehicle insurance only to find out after an accident that coverage was denied.  The insurance business is one that people should negotiate carefully.

If you buy a house for $350,000 that cost $150,000 to build on a lot that cost $80,000 why are you paying insurance for $350,000?  The land will still be there!  Yes, there are some clever answers why that is calculated into the equation but mortgage insurance, a little different than the fire insurance described, insures the mortgagee so that in the event of your death it may be paid out. 

Should you insure a $200,000 mortgage on a $300,000 house for ten years, after which the mortgage is down to $95,000, your premiums will still be based on a $200,000 mortgage.  The other germane point with this type of insurance is that the premiums are significant and the benefit, if collectible at all, is conferred on one’s heirs.  Let’s not lose sight of the fact that the mortgagee will get paid out anyway from the proceeds of the sale of the house or the assumption of the mortgage arrangements.  It may be more economically viable to contemplate increasing life insurance instead.

Life insurance must be claimed after you die – the insurance company is not going to follow you around to see when and how you die.  But is an insurance claim is made they will ask how you died to look for plausible deniability.  If your heirs don’t claim the insurance the insurance company just keeps the premiums and the interest earned.  The point here is that you really need to develop an awareness of the cost of insurance as well as the viability of it.  Insurance costs can be very high and eat into household budgets very significantly:

Type of Insurance Monthly Premium
Car Insurance   $125
Household Insurance   $85
Healthcare Insurance   $115
Mortgage Insurance   $60
Travel Insurance   $25
Burial Insurance   $60
Total $470

In this example the annual premiums are $5,640 and the pre income tax cost may be about $8,000 from you gross annual salary.  Some insurances are necessitated by law or regulations some are entirely optional.  Think about what you really need to secure the future for you and your family.

Should you file for bankruptcy the trustee becomes, through vesting, the de facto beneficiary on policies that name your estate as the beneficiary.  Car, mortgage, household and health insurance policies rarely, if ever, have any redemption value and so they are what we might call “creditor proof” meaning that as long as you maintain regular payments you can keep the insurance.  However, should you have a claim the trustee may intervene and seize the proceeds.

Some life insurance policies have cash redemption or loan values assigned and may be exposed to seizure by the trustee.  Policies that have a designated beneficiary, falling within a preferred class, would be exempt from seizure but that exempt status may still be challenged by the trustee in the event there were recent changes in the beneficiaries from non-exempt classes.  Burial insurance, or prepaid funeral arrangements, may be collapsed by a trustee as well so if you are in a fragile financial state and risk the possibility of facing an insolvency proceeding, they may not be the best investment.

The bottom line is that insurance is expensive, it is sometimes inappropriate and oftentimes may not pay out at all.  You should make sure that your heirs know about your policies, where they are, the policy numbers and the befits and beneficiaries.  Have a meeting with a reputable local insurance broker to make sure that you are not buying something you don’t need and remember to discuss the impact of insolvency proceedings with a  Licensed Insolvency Trustee.