Ken Greig - Apr 05, 2022

Bank owned insurance vs. personally owned insurance
One of the questions that clients often ask is the difference between bank owned insurance and personally owned insurance. When it comes to this, there are a number of issues that need to be considered. Who is the program meant to protect? Is the benefit level or does it decrease over time? Who actually owns the policy and who is the beneficiary of the proceeds? Let’s look at each of these further and compare. Bank or creditor insurance is written by the banks in order to protect themselves in the event the borrower has died prematurely prior to the loan being paid off. The balance owing on the loan/mortgage or line of credit will be paid off should the borrower pass away. The amount of coverage will decrease as the loan is paid down even though the premiums paid by the borrower will remain level. While the balance being eliminated is a benefit to the borrowers family, the policy is owned by the bank and is a contract between the bank and the insurance carrier, so the proceeds of the policy are paid directly to the bank to clear the balance. There are no options for the borrower. The bank controls the policy and can change carriers at their discretion.

Personally owned insurance
With personally owned insurance the policy can be designed so that there is a level amount of death benefit and a level premium amount for the lifetime of the loan/mortgage. For example, if the mortgage amount is $350,000.00, the initial death benefit could be $350,000 and this can remain level throughout the lifetime of the policy. If a significant portion of the loan/mortgage has been paid down, the proceeds can be used to clear the balance with the remainder going directly to the beneficiary. That beneficiary is your family member, so this opens up several options depending on the exact situation. This policy is owned by you and is a contract between you and the insurance carrier. This is referred to as a unilateral contract or one-sided contract, which means that you are the only one that controls the policy and no changes can be made without you. With personally owned insurance, the policy can be integrated with other insurance needs that may be present. There are different types of life insurance products that each carry their own benefits and associated costs and can be tailored to meet your needs and goals.

There is one other consideration and that is regards to how the policy is underwritten. Underwriting is the process an insurance company goes through in order to offer to insure a person. This may include medical questions, paramedical exams such as blood and/or urine tests. Doctors reports or independent inspection reports can be ordered including drivers license histories or employment confirmations. With some creditor insurance there are little or no medical questions or other underwriting done at the time of the application. Some of these programs are issued without considering health issues but are then looked at when a claim is made. The insurance carrier may then look back and consider health issues back to the time of the application before agreeing to pay out the benefit. Some of these programs may be guaranteed issue policies which means that the premiums are higher knowing that some people with poor health are going to be covered and the good risk people need to supplement the poor health people applying.

Personally owned insurance programs are normally underwritten at the time of the application and issued once all the relevant issues have been considered. Once issued and accepted, the one-sided nature of the policy takes over. There’s rarely an issue at the time of the claim and it’s just a process of gathering the appropriate documentation.

Most people will agree that the advantages of personally owned insurance programs far outweigh what is offered by the banks. Proper advice from a qualified financial advisor who considers all of your circumstances is extremely important. Everyone’s situation is unique and should be dealt with on it’s own merits. If you have any questions or concerns, please feel free to contact me. I have been in the financial services industry since 1994 and would be happy to speak to you.

The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation.
For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.