A large loan or mortgage is a commitment that lasts many years. A lot can happen in that time, and banks know it well. That is why borrowers are often offered life and health insurance when they take out a loan. Let’s look at how this cover works and how to avoid overpaying for it.
Who the policy protects
If something happens to the borrower — death or severe disability — the insurer pays off the outstanding debt to the bank. The family is not left alone with the loan, and the mortgaged flat is not lost to cover the debt. So the policy protects not only the bank but, above all, the borrower’s loved ones.
How borrower insurance works
- The sum insured usually equals the outstanding debt and decreases as the loan is repaid. Sometimes it is set with a margin so that part of the payout remains for the family after the bank is paid.
- The beneficiary is usually the bank, up to the outstanding debt. The difference between the sum insured and the debt may be paid to the family if the contract provides for it.
- The risks are death from any cause, disability and sometimes temporary incapacity for work. The set of risks directly affects the price.
- The term covers the whole loan period or one year with annual renewal.
Is insurance mandatory?
Life insurance is a voluntary class of insurance. A bank may offer better loan terms if you have a policy, but the borrower is entitled to weigh what this decision costs overall. It is important to understand the bank’s requirements for the policy and whether you can buy it from a company other than the one suggested at the branch.
What to check in the contract
- The list of insured events and exclusions: for example, illnesses diagnosed before the contract was signed are often not covered.
- How the sum insured decreases and whether it matches the repayment schedule.
- What happens to the policy if you repay the loan early: can you terminate the contract and get part of the premium back?
- Who receives the payout and in what share.
- Deadlines for making a claim and the list of documents required.
How not to overpay
The cost of borrower insurance can vary noticeably between insurers even for the same conditions. It makes sense to compare several offers, clarify the bank’s requirements and choose a programme that covers your specific risks. Sometimes it is more cost-effective to take out an ordinary term life policy with a sum that covers both the debt and the family’s needs.
A Dynasty consultant will help you compare the terms of several insurers and choose a policy that meets your bank’s requirements, and you can estimate the approximate cost in the calculator on our website.