If you’re looking for grist for the argument that term life insurance provides greater value than the banks’ creditor products, you may find it in the final report from the joint insurance regulators on incidental sales of insurance.

The report, which was released at the beginning of November by the Canadian Council of Insurance Regulators, says clients don’t fully grasp mortgage life insurance that is offered by the major banks. Using the Flesch reading ease test, the study determined that the applications for mortgage insurance sold by the banks are complex and invariably result in a lack of understanding by applicants. (See story on page 8.)

“This inability to understand may come from either or both of the following complexities,” the report states, “the level of language used or the way in which the information (including the qualification questions) is presented and structured.”

That is just another reason for clients to contact independent advisors when the time comes to buy mortgage insurance, says Chris Karram, co-owner of Toronto-based Safebridge Financial Group.

“A lot of clients will fill out the application on their own. But they may not understand it clearly, and that can be a problem,” says Karram, who runs his life insurance business through managing general agency Prolink Financial Group Inc. “But when clients are dealing with an advisor, the advisor’s job is not only to ask the questions but also to make sure the questions are understood.”

The challenge for you as an advisor is finding clients who are looking for these products. Developing referral relationships with mortgage brokers, Karram says, gives advisors opportunities to explain the value of term insurance.

Karram co-owns Safebridge with Elisseos Irotakis, a certified financial planner who is also a mortgage broker with Verico Financial Group Inc. Irotakis and Karram exchange referrals when opportunities arise.

Application comprehension is just one of many reasons to choose term life insurance over creditor insurance, according to many advi-sors. The main differences between the products fall into four categories, says Brian Shumak, a CFP and insurance advisor in Toronto:

> Beneficiary. The banks’ mortgage insurance always names the bank as the beneficiary of the policy. For any other term policy, the owner of the contract can name any other person, trust or company.

“That’s a huge issue,” says Shumak,” because it’s not always the best choice to pay off your mortgage with the bank, compared with other liabilities or needs.”

> Decreasing Coverage. The second stumbling block for the banks’ creditor insurance is the decreasing coverage, which represents the gradual decline of the size of the mortgage. Although a client’s premiums remain the same throughout the length of the mortgage, the benefit effectively shrinks.

> Ownership. The bank also owns the policy. So, although the client pays the premium, the contract isn’t portable if he or she decides to change mortgage lenders.

If clients want to renegotiate the mortgage — to change the lender or the interest rate or to take out a line of credit against the equity in the house — they must apply for new insurance.

“That’s not always the best thing,” Shumak says, noting that a client applying for insurance 10 years later may find that his or her rates have risen substantially. “While the rates are very competitive early on, they are horrific later in life.”

> Cost. In Karram’s three years of writing independent term policies (he was previously a career advisor with Sun life Financial Inc.), he has never seen a comparable term policy that’s more expensive than a bank’s mortgage insurance.

For their part, the banks don’t compare their products to term life insurance based on features. Rather, the banks see creditor insurance as a product for customers who do not have an advisor.

“Only about 40% of Canadian families have individual life insurance,” says Terry Campbell, vice president of policy at the Canadian Bankers Association in Toronto in its submission to insurance regulators. “That coverage is concentrated among upper-income earners. [Bank mortgage insurance] appears to be best able to meet the needs of middle- and lower-income families.”

Karram sums it up this way: the banks’ product is not cheaper; it’s simply more accessible. Making alternatives to the banks’ mortgage insurance more accessible can be a good prospecting strategy.

“Once the client is in the door, we can provide value beyond mortgage insurance,” says Karram. “We get to see how the relationship can unfold.” IE