Considerations for Loan and Mortgage Insurance: Balancing Security and Costs

When it comes to loan or mortgage repayment, securing insurance to cover unexpected financial difficulties may be a sensible option, particularly for those with substantial loan or mortgage balances. This insurance provides coverage for a designated period if individuals experience job loss or long-term illness, offering a safety net during challenging times. However, it’s important to consider the impact of premiums on your family budget, as they can be a significant expense. On the other hand, taking out insurance can potentially lower your mortgage interest rate, providing long-term cost savings.

While loan or mortgage insurance is not mandatory, a survey conducted by g82 for BNP Paribas Cardif Insurance revealed that 85% of respondents who had obtained insurance for their loans or mortgages agreed that it gave them a sense of security in the event they became unable to make payments due to job loss, long-term illness, or disability.

Most banks offer insurance options, although some, such as Creditas and Fio Bank, only provide insurance coverage for mortgage payments. Regardless of the bank you choose, your loan or mortgage will be certified by an insurance company that collaborates with the bank.

The main risks typically covered by loan or mortgage insurance include job loss, long-term incapacity for work, disability of the 2nd and 3rd degree (some insurers only cover disability of the 3rd degree), and death. Some insurance providers may also offer coverage for hospitalization or caring for a family member, depending on the bank and insurance company.

The monthly premium for both consumer loans and mortgages varies based on the insured risks and the loan or mortgage amount. Each insurance company employs its own algorithm to determine the premium, often calculated as a percentage of the monthly installment or the total loan amount.

For example, Air Bank charges a premium of 8.7% of the prescribed loan or mortgage installment, while Česká spořitelna’s premium ranges from 7% to 11.3% for consumer loans and 6.69% to 9.5% for mortgages, depending on the insured risks. Fio Bank calculates the premium based on the mortgage amount and the chosen package, ranging from 0.6% to 0.85% per year.

In contrast, mBank’s premium for consumer loans is 0.25% of the initial loan amount. Raiffeisenbank charges a premium of 8.8% of the agreed monthly loan installment and 8.9% of the agreed monthly mortgage installment. At UniCredit Bank, loan premiums range from 5% to 10% of the monthly installment, depending on the chosen insurance package, while mortgage premiums range from 5.5% to 11% of the installment.

While insurance provides peace of mind in unexpected events, it comes at a cost. Premium payments can amount to significant sums over the insurance period. For instance, based on the provided tables, a consumer loan of CZK 150,000 with a 60-month repayment period or a mortgage of CZK 3.1 million with an 80% LTV, fixed rate for five years, and a 20-year repayment period, along with insurance covering all risks (death, total disability, long-term illness, and job loss), would incur the corresponding premiums.

It is important to note that insurance payouts are subject to certain conditions, such as waiting periods (typically around 90 days) and requirements to register with the labor office in the event of job loss. Insurance companies generally cover no more than 12 consecutive installments, except for UniCredit Bank, which only provides coverage for six installments for consumer loans.

In conclusion, while taking out insurance to cover loan or mortgage payments can provide a sense of security, it

Article by Prague Forum

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