When taking out a bank loan, we can expect that we will also be offered several additional products, such as checking and savings account, credit card, or insurance. Interestingly, the last of the above-mentioned services, i.e. insurance, is also increasingly offered by loan companies. A question arises in this connection – is loan insurance a good choice? How much does it cost and can you give it up?
What is loan insurance?
Loan insurance is a security for its repayment in the event of the debtor’s death (you can also meet security for financial liabilities in the event of job loss or disability, but mainly in the case of loan insurance ). Thanks to this, the loan company does not have to worry that the debt will remain unpaid if necessary, and the heirs can take over the estate of the deceased without fear that it will involve the need to settle the liability.
Insurance is, of course, a paid service subject to several different conditions. It is worth pointing out that it is granted not by a loan company, which may encourage us or even require it, but by an insurance company cooperating with it. The lender only acts as an intermediary and charges a fee for it.
Is loan insurance mandatory?
Lenders relatively rarely decide to make the issuance of a positive decision conditional on the obligation to ensure the loan. It may sometimes be necessary in the case of loans for very large amounts, especially if the borrower has a low ability of credit. However, if we want to borrow a small amount, we probably will not be required to buy insurance.
In banks, insurance is sometimes required, especially in the case of mortgage loans, if, for example, we decide on a low own contribution or we want to incur such a liability alone.
Loan insurance cost
The cost of insuring a loan is usually a dozen or even several dozen percent of its value. Its amount may be influenced by factors such as the loan amount or the repayment period. Ultimately, the amount payable can turn out to be quite high, especially for loans of large amounts.
It is worth reading the insurance contract
Agreements, regulations, and rules for the provision of services are not particularly interesting readings, which is why many people do not read them at all or only briefly. This is a big mistake that can result in us paying a considerable amount for the insurance, which we won’t even be able to use later if something unfortunate happens to us. Therefore, we should read its terms carefully.
We should pay particular attention to the section on so-called exclusions. If we are talking about unemployment insurance, dismissal for disciplinary reasons may be the exception. In the case of life insurance, the money may not be paid out if the insured is under the influence of drugs at the time of death. Certain exemptions are understandable, but on occasion, you may find it almost impossible to take out insurance as the exemptions cover almost everything.
Withdrawal from loan insurance
It may happen at some point that, whether for financial reasons or completely different reasons, at some point, we will want to resign from insurance. As long as we are not burdened with overdue payments, it should not be a big problem – the insurance company cannot refuse us the option to cancel the insurance.
Often, however, it will not be as profitable as we hoped. As we already know, insurance is a source of income for the lender, and the customer’s withdrawal from the contract means his loss. Therefore, it is worth checking, before signing the contract, what conditions and fees are subject to any withdrawal from it. For example, it may turn out that resignation from insurance will mean an increase in the interest rate on debt, and therefore ultimately we will lose more than we save.
Is loan insurance profitable?
It is difficult to unequivocally answer the question of whether loan insurance pays off because a lot depends on the parameters of the obligation we want to take out. Insurance may be unprofitable in the case of loans for small amounts, where we will pay a lot and get little in return if necessary.
Also, it will be of little use in the case of payday loans, i.e. loans with a repayment period of up to several months. It is very unlikely that something will happen to you at this time that will result in your insurance payout. The longer the repayment period and the higher the loan amount, the more favorable the insurance will be.
Loan insurance – summary
Insurance is a service that most of the time doesn’t come in handy, but when that happens, we’ll be happy we paid for it. We are talking here not only about credit or loan insurance, but also, for example, home insurance.
You can pay for insurance for decades and never use it, but it also happens that it turns out to be useful very quickly. There is no rule in this regard. Nevertheless, for peace of mind, it is worth taking an interest in such a solution, especially in the case of long-term loans for high amounts.