Taking out insurance to cover your ability to repay a loan or mortgage may make sense if you have a high loan or mortgage balance. Insurance companies will pay your payments for a certain period if you experience financial difficulties due to job loss or long-term illness. However, premiums will affect your family budget. On the other hand, taking out insurance can lower your mortgage interest rate.
While insurance is not mandatory, as the survey conducted by g82 for BNP Paribas Cardif Insurance showed, the vast majority of people (85%) who have taken out insurance for their loans or mortgages agreed that it gives them a sense of security in case they become unable to pay due to job loss, long-term illness, or disability.
Most banks currently offer insurance. However, some banks, such as Creditas and Fio Bank, only allow you to insure mortgage payments. Even if you deal with a bank, your loan or mortgage will be certified by an insurance company that the bank cooperates with.
The primary risks that threaten loan repayments and against which you can take out insurance are job loss, long-term incapacity for work, disability of the 2nd and 3rd degree (some insurers only include disability of the 3rd degree), and death, but also hospitalization (e.g., Air Bank or mBank) and caring for a family member (e.g., Air Bank or Česká spořitelna).
The monthly premium amount for both consumer loans and mortgages depends on the insured risks and the loan or mortgage amount. Each insurance company has its algorithm for determining the premium, usually a percentage of the monthly installment or the total loan amount.
For instance, at Air Bank, the premium amounts to 8.7% of the prescribed loan or mortgage installment. At Česká spořitelna, it ranges from 7% to 11.3% of the monthly installment for consumer loans or 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.
At mBank, the premium for consumer loans is 0.25% of the initial loan amount. At Raiffeisenbank, the premium amounts to 8.8% of the agreed monthly loan installment and 8.9% of the agreed monthly mortgage installment. At UniCredit Bank, the premium for a loan ranges from 5% to 10% of the monthly installment, depending on the chosen insurance package. In contrast, mortgages range from 5.5% to 11% of the installment.
Insurance can give you peace of mind in an unexpected event, but it is not free. You will pay significant amounts for the premium during the insurance period. For example, for a consumer loan of CZK 150,000 with a repayment period of 60 months and a mortgage of CZK 3.1 million, LTV up to 80%, fixed rate for five years, and a repayment period of 20 years, and insurance covering all risks (death, total disability, long-term illness, and job loss), you will pay the premiums listed in the tables above.
To receive insurance payouts, you must comply with certain conditions, such as waiting periods (usually 90 days) and registration with the labor office in case of job loss. Insurance companies will pay for no more than 12 consecutive installments, except for UniCredit Bank, which pays only six installments for consumer loans.
In conclusion, taking out insurance to cover your loan or mortgage payments may give you peace of mind, but it is not mandatory. You should carefully weigh the cost and the benefits, especially if you have a low loan or mortgage balance.