We insure your home, car and our loved ones when they go on holiday abroad. Few people think about such things as credit insurance until the bank itself does not force us to buy such a policy. The question is what is credit insurance, is it mandatory and does it make any sense to buy it?
Credit insurance what is it?
Credit insurance is one of the most commonly used forms of debt repayment security. It can become extremely useful when you find yourself in a difficult financial situation (e.g. you lose your job or health), or when you run out and your family has to deal with repayment of the remaining part of the loan. In the past, bills of exchange, sureties, and pledges played a similar role.
A loan with insurance is most often offered to people whose financial situation is unstable or their debt is taken for a very long period (e.g. in the case of a mortgage).
The insured loan is primarily to give a sense of security not only to the debtor but also to the bank – he is guaranteed that in the event of a specific event, the insurer will repay the remaining part of the debt on behalf of his client.
Does credit insurance have to be mandatory?
The bank has the right to require us to take out insurance when we do not meet all the conditions to receive this loan. An example is the low own contribution – banks often agree to grant loans to people who have not been able to collect all the amount needed, but in exchange for the risk incurred, the client must buy additional collateral.
Therefore, the question of whether to take out a loan with insurance should be answered by the customer himself, and the bank cannot force him to do it.
The loan offer is often constructed in such a way that it would not be profitable for the customer to contract without insurance. In this case, the bank usually imposes a higher margin or commission.
Cash loan insurance
Cash loan with insurance is definitely less common than, for example, insurance with a mortgage loan. This is mainly due to the length of the period for which the commitment is made. In the case of cash loans, it is usually up to 5 years, while for mortgage loans we talk about 20, 25 and sometimes even 30 years.
Banks are increasingly constructing two offers for one loan – with and without insurance. In most cases, a loan with compulsory insurance is promoted, which is usually much cheaper and has a lower interest rate
The customer can, of course, take advantage of the loan without insurance, but this involves additional fees.
How does cash loan insurance work?
It really depends on which insurance you choose. There are three most common types of insurance:
- Life insurance.
In the event of the borrower’s sudden death, the insurer repays the balance of the loan. He does so at the written request of the deceased’s family or bank and after presenting the necessary documents confirming the borrower’s death (e.g. death certificate).
- Insurance against illness or permanent disability.
The insurer repays the remainder of the loan if the borrower suffers a permanent bodily injury that prevents him from continuing to work. The liability is repaid only after the borrower submits a written application, together with documents confirming invalidity.
- Insurance against job loss.
The loan is repaid if the borrower loses his job, but not because of him. Then the insurer does not pay the entire remaining amount, only 6 or 12 subsequent installments. To pay the insurance you will need documents that confirm the termination of employment, e.g. a work certificate.