Whatever the credit, it is in the borrower's best interest to take out specific insurance. Offered by the lending institution, it can be changed by another offer from another player. Beyond the cost represented by the borrower's insurance, it is above all necessary to understand and analyse the conditions of application when a claim occurs.
Without hesitation, loan insurance is associated with crédit immobilier. It must be said that the sums involved are significant, whether it is a main residence, a second home or a rental investment. It applies almost systematically to all loans: personal loans, car loans, consumer credit, lines of credit for professionals (it is sometimes possible to take out a loan without insurance for professional purposes), etc. The aim is to reassure the bank that the sums still owed will be repaid when health-related events prevent the borrower from temporarily or permanently paying the scheduled monthly instalments. The role of the insurer is to take over the outstanding balance, or the part of the outstanding balance that can be taken over. " Borrower's insurance is a security for the bank, but also for the borrower: on the one hand, in the event of an unforeseen event, such as a death, the loan will continue to be repaid; on the other hand, it secures and protects the family, which will not inherit the loan in the event of death," explains Liza Hérault, international customer advisor, at Valorama.
Loan insurance: Group contract vs. external contract
From a legal point of view, borrower's insurance is not compulsory, but it is often a necessary condition for obtaining a real estate loan. This market practice imposed by the banks has become so common that it has become unavoidable, except in certain specific cases which remain marginal (cover, certain mortgages or professional loans, etc.). In practice, it is the credit organisation itself that will propose an insurance offer. This is known as a group contract. " It was negotiated 10 or 20 years ago, for the majority of people in a context that was totally different from today's and for which there is no room for manoeuvre to change the conditions. Life expectancy has increased, for example, and illnesses that were once blacklisted can now be cured... Group contracts are often not adapted to the current context," regrets the international customer advisor at Valorama. And for good reason, it is a group contract: it responds to the global needs of borrowers. On a case-by-case basis, there may therefore be a gap between the proposal and the borrower's needs.
To get a cover closer look at the reality of the individual situation, there are external contracts. They have the advantage of flexibility and their terms and conditions of acceptance can change based on life events. They take into account societal developments. For example, for working people who work beyond retirement age, these contracts propose the modification of the age limit for covers.
The law provides for the possibility of delegating insurance: i.e. choosing an insurance policy other than that of the bank with the same covers.
The decision to change is often based on economic reasons. It does not have to be based on that alone. "The price varies above all according to the coverstaken," warns Valorama. Not all contracts offer the same thing. Some are irrevocable, others not. Some are 'lump sum', others 'indemnity'. You should therefore read the proposed contracts carefully. To find out exactly which coverspolicies are offered by the bank's group insurance, you need to refer to the SIF - Standardised Information Sheet - a document that the bank's internal or external insurer must provide. It lists the needs and the proposed offer. Among the points to be checked is the irrevocability of the cover. In other words, changes in the policyholder's situation must not lead to changes in the application of the proposed covers. Another point not to be overlooked is the exclusions of the contract, particularly sports such as skiing, hiking, climbing, water sports, etc.
The coversbasic loan insurance
Any borrower's insurance covers the loan when the subscriber dies or suffers an irreversible loss of autonomy. These are the covers basic ones, they apply to any type of credit. An insured can be satisfied with them for rental investments, "because the property is intended to be rented. The rents will make it possible to repay the bank due date. There is therefore no need for additional assistance," Liza Hérault points out. This also applies covers to personal loans and consumer credit.
In the event of the borrower's death, the outstanding capital will be paid by the insurer to the bank. In the case of a loan for several people, the bank may ask for an insured share per person. This percentage is regularly based on the couple's income so that each can continue to meet the debt if the other dies. If a couple's income is equal, each person is covered for at least 50%. Valorama illustrates: " If there is 60% of the income on one side and 40% on the other, then the former will be covered for at least 60%. In case of death, 60% of the outstanding capital will be paid by the insurance. The surviving spouse will have 40% of the remaining capital to repay. It is perfectly possible to insure each person for 100% of the loan, but this will mean a higher insurance policy.
The coverof total and irreversible loss of autonomy occurs when the insured's medical condition does not allow him/her to perform the four ordinary acts of life: washing, dressing, eating and moving around. As a result, he or she will always need a third party to perform these actions. It is the doctor who declares this condition and the insurer pays the outstanding capital to the bank. There is no second opinion here, because the situation leaves little room for interpretation, there are no grey areas. " The insurer does not pay when a pathology is present that the person had before signing the contract and that was not declared. This is a false declaration, and it is questionable," says the international customer advisor.
The coversoptional of the loan insurance
In the case of an acquisition of a principal or secondary residence, covers additional or optional purchases must be made. They all correspond to specific situations and with a risk for the bank of not being paid. There are four of them:
- incapacity for work (ITT): the insured person is unable to work in any professional capacity as a result of an accident or illness. The insurance will pay the monthly payments in proportion to the number of days of justified incapacity. Please note that there is always an excess. For an employee, it is 90 days, i.e. the equivalent of the period during which the insured is covered by health insurance. For civil servants, this period can be up to 180 days, as social security coverage is longer than for private sector employees. For the self-employed, it is 30 days because of the low level of coverage in this situation.
- permanent partial disability: the insured is injured and left with a lifelong disability that prevents him/her from continuing in his/her profession, but he/she can retrain for other professions where he/she is not disabled. Some contracts do not cover all professions, such as a pianist, a surgeon, etc. If an accident occurs in the hand, for example, coverdoes not work. In the insurance clauses, the list is communicated.
- permanent total disability: the insured is unable to work. In this case, as in the case of total and irreversible loss of autonomy, the insurance company pays the bank the remaining capital due.
- loss of employment: this option is rarely offered and taken out, as it doubles the cost of the policy. Moreover, it is subject to specific general conditions, as there are many conditions of application, such as being registered and eligible for Pôle emploi, a waiting period, a deductible period, etc. And in the end, only part of each monthly payment during the period of unemployment is taken into account.
The medical questionnaire and risk assessment
Two documents enable the loan insurer to assess the risks it is taking: the medical questionnaire and the application form.
The medical questionnaire is compulsory. In addition to this questionnaire, a medical examination and blood test may be required depending on various parameters (amount insured, age, pathologies, answers to questions, etc.). In this respect, there are significant differences between group and external contracts. " During COVID-19, the requirement for a medical examination or tests was reduced for external contracts. A declaration on the client's honour was sufficient, possibly with the last examination if it took place less than six months ago. If there is a health problem, there will be no refusal of cover as long as the questionnaire has been filled in truthfully ", explains Valorama. This approach could not be proposed in the context of group contracts for the sake of fair treatment of all policyholders. Note that there is the Aeras agreement to allow long-term sick people to borrow. Moreover, each year, banks revise the assessment of each illness according to the improvement in medical care.
The information provided on the underwriting form is also decisive in assessing the risk. It includes: occupation, business trips, schedules, means of transport, etc. All elements that may represent a risk are evaluated. Finally, these risks may or may not add to the cost of the insurance policy, but may also encourage the subscription of an insurance delegation, if the needs are too far removed from those covers offered by the group contract proposed by the bank. In the end, a good insurance policy is one that offers the best rate based on the borrower's profile.