Today, in almost all banks and financial institutions, when applying for a loan, one of the main requirements is the signing of a loan insurance agreement.
What is credit insurance?
Generally speaking, this is a measure necessary for the lender to guarantee the money back for any reason that does not allow the borrower to repay the loan. This can be life and health insurance of the borrower, that is, if an accident occurs and the borrower gets injured, which leads to disability or death, the insurance company will return the funds to the lender (bank or other financial institution) for the loan in the form insurance compensation.
If this is a loan secured by property, the pledged object is insured without fail, since no bank will take risks and take uninsured property as collateral, since if it is damaged or destroyed, the lender may not receive the funds provided on the loan at all. It provides as one of the voluntary types of insurance – insurance of loans (including the liability of the borrower for loan non-repayment).
One of the risks for this type of insurance may be the risk of loan’s non-repayment as a result of the loss of work by the borrower (debtor). In this case, the insurance company pays insurance compensation in the appropriate amount (provided for by a specific insurance agreement) of the debtor’s outstanding payments and interest on them. However, it is necessary to understand that payments for this type of insurance are usually the most expensive, since the risk of losing a job is currently quite high.
The insurance agreement is usually concluded with an insurance company offered by the bank.
Is insurance compulsory when issuing a loan?
If a mortgage agreement is concluded to secure the execution of a loan agreement, then an insurance agreement for the property transferred to the mortgage must also be concluded. The mortgagee is obliged to insure the subject of the mortgage for its full value against the risks of accidental destruction, accidental damage, if the mortgage agreement does not entrust this obligation to the mortgagee. Insurance agreement is in favor of the mortgagee, who, upon the occurrence of an insured event, acquires the right to claim against the insurer. When a new mortgagee acquires rights under a mortgage agreement, he also acquires the right to claim against the insurer.
If a mortgage agreement is not signed, then the conclusion of an insurance agreement is not obligatory for issuing a loan. Banks are prohibited from requiring a client to purchase any goods or services from a bank or from a related person of the bank as a prerequisite for the provision of banking services. However, even despite such norms in the current legislation, most banks can simply refuse to sign a loan agreement if an insurance agreement is not concluded. Of course, you can challenge such a refusal in court, however, to enter into a long lawsuit with the bank in order to recognize their actions regarding the refusal to issue a loan due to the failure to sign an insurance contract is today an unprofitable and illogical step, since this it will take you quite a lot of time, plus you will incur the costs of at least a court fee, and at most – also for legal assistance.
In any case, before signing a loan agreement, it is imperative to clarify with the lender whether an insurance agreement should be concluded (so that the issues of insurance of the borrower’s liability for non-repayment of the loan do not come as a surprise to him in the future), which insurance events are covered by the insurance agreement, the duration of the agreement, what amount is required pay for insurance and up to what date you need to do it. All this, again, is necessary, first of all, so that you understand in what cases you can count on insurance payments, and do not miss the opportunity to receive them due to failure to pay the next insurance payment on time.
So, there have been cases when people, having taken out insurance at the bank when receiving a loan, did not make the insurance payment on time and, when an insured event occurred, because of this, they could not count on insurance payments. It is also necessary to immediately understand in what situations the insurer will not pay out funds. As a rule, these are force majeure circumstances, such as natural disaster, military action, civil unrest. Also, the insurer is exempted from payments in case of deliberate actions of the insured person to receive insurance compensation. If the terms of the insurance contract do not suit you or they are spelled out too vaguely, and it is impossible to make changes to it, then it is better to refuse to sign such a contract and find other options.
It is also important to understand that the conclusion of an insurance contract when receiving a loan is not a negative point. So, on the one hand, you will need to pay extra payments, and on the other, if something bad happens to you or to the pledged item, then you will be protected by this particular insurance contract. In addition, some banks and financial institutions, if an insurance contract is concluded, will be able to provide better terms for a loan, for example, a large loan amount, or provide funds for a long term, or reduce interest on the use of credit funds.
Many borrowers have a question whether it is possible to return the money paid for insurance after the loan is repaid? Unfortunately, it is not. Since insurance, as a rule, is issued at the expense of credit funds and it is valid until the execution of the loan agreement, it is considered that during the time you used credit services, you also used the services of an insurance company, therefore, no one will refund you money for this service.
If the insurance company refuses to make payments even in the event of an insured event, then the borrower must defend his rights in court.