How loan insurance works
What is loan insurance and how does it work ? Regarding this issue, there are some very precise distinctions to make and we will take you to discover them during this small but useful guide to insurance on the loan.
Let’s start by saying that it is a form of protection for loan applicants. Its function is to protect yourself in the event that you are no longer able to continue to pay the remaining installments of the loan. But many people wonder if and what risks they carry.
In which cases is loan insurance useful?
Unfortunately, a service like the loan insurance is not free, but is added to the total cost of the financed amount. All in all, however, it can really be a useful service and in some cases we must not really deprive ourselves of it.
The cost of insurance can vary greatly depending on the bank that offers it. So the service becomes more convenient simply by making comparisons between the various institutions and requesting it from the highest bidder.
More than the cost, the problem for an applicant is to get their own accounts to understand when it is convenient or not to add insurance on the loan. In fact, there is also another detail to take into account, sometimes insurance is optional, but at other times it is even mandatory.
The operation of insurance
When a policy is requested for its loan, very often the product that is offered is a Credit Protection Insurance, also called CPI.
The CPI must be paid together with the loan then it will weigh on the final cost of the same, then on the Taeg. The monthly installments will increase slightly based on the cost of the policy stipulated. The cost is not always installable, sometimes the bank can request the payment of the policy in advance and in full.
What is the function of the policy? Cover the cost of the remaining installments, if the borrower can no longer pay for some reason. Let’s see the possible causes in which this could happen:
- Total permanent disability
- Serious economic difficulties
- Loss of work
Should one of these eventualities occur, payment of the policy is triggered only upon presentation of the documents attesting to one of the unpleasant events just listed. If a doctor or other entity has to intervene to ascertain the situation, the costs are borne by the loan applicant.
Choose an advantageous insurance: how to do it?
There is a very simple way to understand which is the most advantageous loan: compare the Taeg or the Annual Percentage Rate. This rate is the expression of all the loan costs put together, so the lower the loan, the cheaper it is.
The Taeg is therefore always to be taken into consideration because it includes interests, ancillary charges and of course the cost of insurance. So for the same services required in the financing, just choose the one with the lowest Taeg to save.
It must then be said that recently according to the new terms of the law, the banks are forced to present two quotes for loan insurance, offered by companies that must in no way be related to the bank itself.
Finally, pay attention to policies with a revenge clause which would mean that the insurance company may later come to request the money upfront for the loan.
Loan insurance: mandatory or optional?
Generally, loan insurance is not mandatory. Only loans with one-fifth of the pension or salary are compulsory, so it is required in all cases where the installment is paid directly on the payroll.
This need arises for the bank in order to protect itself even from the bankruptcy of the company that is in charge of the employee requesting the loan. In other cases the loan insurance is optional, sometimes it happens that banks require it as an additional guarantee before proceeding with the loan.
If you would like to give an advice, we would say that those who wish to take out an insurance should do so for large loans, which therefore require a restitution that is destined to last over time. In general, if you have doubts about your real ability to support the loan in the long term, it is better to have a policy.