From time to time, most business owners will need to borrow money from a bank to help with financing new equipment, a real estate purchase or to smooth out bumps in cash flow. When you do, your bank manager may suggest that you purchase life insurance to pay the debt off should you die. For larger financing needs the bank may request collateral insurance as a requirement of granting the loan.
When faced with needing money from a bank, many business owners will agree to purchase the bank sold life insurance thinking it will help secure the deal. Not only is this incorrect, there are 5 compelling reasons you should never purchase your life insurance from a bank.
Bank sold life insurance is a “one-size-fits-all” solution that lumps all people (smokers and non-smokers) together in banded age groupings.
When you purchase life insurance from a broker it is based on your age, your gender and your health. The premium that you pay never subsidizes the cost of insurance for other bank customers.
To illustrate how much more you could end up paying with a one-size-fits-all insurance solution, I priced a $1,000,000 policy for a 46 year old male non-smoker. The premium quoted by one of Canada’s major banks was $520/month increasing to $650/month after 5 years. This compares to $117/month for a 10 year term or $189/month for a 20 year term from one of Canada’s major insurance companies.
Purchasing a 10 year term policy from a broker provides over $56,000 in savings compared to a policy sold by the major banks.
Simply put, underwriting is the process an insurance company goes through to decide if you are healthy enough to purchase life insurance.
Bank sold life insurance typically asks a few general health questions as part of the application but does the main underwriting post-claim. This means that the bank could collect premiums from you for years and then at your death decide you were not healthy enough at the time you purchased the coverage and refuse to pay the claim. Yes, this happens all too frequently!
When you purchase life insurance from a broker it will be fully underwritten prior to you paying for the coverage. This means that provided you keep current with premiums, your insurance benefit is guaranteed to be paid at your death.
#3, Insurance Benefit
With bank sold life insurance the amount of the benefit is usually tied to the remaining balance on the debt it is meant to cover. This means that over time the amount of benefit payable is reducing while the premiums you pay are level. This has the effect of increasing the cost of each $1.00 of insurance benefit over time.
When you purchase life insurance from a broker you never pay for a benefit that is lost simply because you have reduced the amount of the loan.
With bank sold life insurance the bank is the beneficiary. This means that at your death the insurance benefit goes directly to the bank to pay off the loan or mortgage it is associated with. Surviving business partners have no say in how the funds are to be used.
When you purchase life insurance from a broker, unless there is a collateral assignment on the policy, your business partners can decide what is best for the company. It may be more beneficial to use some of the insurance benefit to help with day to day operations or to purchase new equipment to help grow the business.
With bank sold life insurance you are not able to transfer the coverage from the original loan should you decide to re-finance with a different bank in the future to lower borrowing charges. This means that you will need to obtain a new policy at likely a higher premium. You may also be unable to qualify due to a change in your health.
When you purchase life insurance from a broker you are the owner of that policy. You can use it to cover any number of debt obligations with any number of banks. As long as you maintain your premiums, refinancing or changes to your health will have no impact on the benefit paid when you die.
Also, it is important to note that life insurance is not the only coverage sold by banks. Many banks offer disability and critical illness insurance to help make loan payments should you become injured or suffer a serious illness. Many of the same reasons for not purchasing life insurance from your bank apply to these types of insurance as well.