Understanding loan insurance is not always easy. As part of a home loan contract, borrowers must take out a credit insurance policy to cover their loan against total loss of income or death. It is therefore important to be familiar with certain aspects of the contract before signing.
What is loan insurance?
Loan insurance is a contract attached to a loan and limited to the duration of the loan. It is a guarantee that benefits both the creditor (whether banks or financial institutions) and the debtor. On the one hand, the lending institution is able to protect itself against any default by the borrower, which could result in the borrower no longer being able to repay the loan. Secondly, it protects the borrower from having their property seized in the event of non-payment. This represents a safety net for both the borrower and his or her family.
What risks are covered by loan insurance?
What's special about loan insurance is that it covers a number of eventualities. First of all, there is the job loss guarantee, which covers redundancy on an open-ended contract, early retirement, partial unemployment, voluntary resignation, and so on. Here again, it has to be said that the terms and conditions of contracts vary considerably from one lending organisation to another. Certain factors are taken into account, such as the duration and method of compensation, the age limit for taking out the policy and the waiting period. Beyond that, it has to be said that implementing the job loss mechanism can sometimes be quite complex, and its effects are fairly relative.
Then there is the cover for incapacity for work and invalidity. If the disability is permanent and absolute, the insurer will pay the same benefits as in the event of death. In the event of partial invalidity, repayments will be made as and when they fall due.
Finally, in the event of death, the insurer repays the capital due on the death of the borrower.
You should always check that the contractual conditions that apply to these guarantees correspond to your profile.
Loan insurance: is it essential?
It has to be said that borrower's insurance does not only apply to home loans, but can be taken out for any other loan. Although there is no legal requirement to take out creditor insurance, it remains a necessary, not to say unavoidable, condition for obtaining a loan. Banks and financial institutions will never grant a loan if the borrower has not taken out this type of insurance beforehand. Although it is not legally required, it is nonetheless essential for the peace of mind of both lender and borrower.
What are the advantages of loan insurance?
According to some statistics, more and more borrowers are opting for creditor insurance when taking out a loan. This is because it covers the capital borrowed in the event of death. In fact, it should be noted that it is recommended to take out supplementary death insurance in addition to a traditional cover contract, especially when the loan-to-value ratios are not 100% for borrowers.
There is a clear distinction between these two types of cover. In the event of the borrower's death before the end of the loan contract, the loan insurance is responsible for repaying all the outstanding capital. However, it has to be said that this is often not enough, especially when the lowest loan-to-value ratio concerns the deceased co-borrower.
It should be noted that supplementary death insurance provides additional capital for the family to make up for any shortfall in income. The aim is to enable the co-borrower to maintain a decent standard of living and ensure repayment of the capital owed.
Loan insurance: two types of insurance since the Lagarde Act
Since the Lagarde Act was introduced in 2010, borrowers are no longer obliged to take out this type of insurance issued by the lending bank. You can now look for cheaper insurance than that offered by the bank granting you the loan. It should be noted, however, that the insurance contract you obtain outside the bank will be at least equivalent to the contract offered by the bank.
There are two types of insurance: group insurance and delegated insurance. Offered by banks, group insurance is a bit like a collective offer, but at a single rate. Delegated insurance, on the other hand, is individual insurance with a rate set according to the employer's profile.
Here's the trick: know the conditions for reimbursement
Knowing the various guarantees that make up your loan insurance contract is one thing, but knowing exactly the conditions under which the loan repayment is covered is another. The latter is vital.
It should be noted that repayment of a loan is taken into account from the moment the risk occurs, unless the risk is included in the list of exclusions. For example, in the case of temporary incapacity cover, the deductible only covers repayment after an excess of 3 months. There is also job loss cover, which, like temporary incapacity cover, also requires an excess of 3 months.
The benefits of comparing different loan insurance policies
The Lagarde Act, which now makes it possible to find the best insurance, is a general law governing consumer credit in France. One of its main measures is to enshrine the principle of free competition in the borrower's choice of insurance. Banks no longer have a monopoly on borrower's insurance, whether for a mortgage or a consumer loan. Borrowers now have the option of taking out loan insurance with their lender, or opting for individual offers from other providers.
Loan insurance
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