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Why should we insure life when taking out a mortgage?

Buying property with a mortgage is a crucial decision that should be made carefully. A mortgage loan is long term. Therefore, it is important to have a clear idea of ​​the amount to be monthly paid over the years.
Why should we insure life when taking out a mortgage?

At the end of 2020, the volume of premiums in the life insurance class increased by 27% compared to 2019 and exceeded 97.5 billion tenge. It is hard to determine the share of life insurance agreements under mortgage, but a significant share is taken by life insurance contracts under consumer loans.
Typically, life insurance is a tool that protects both the borrower and the bank. “Firstly, a life insurance agreement reduces the risk of a mortgage loan default. Secondly, when the borrower dies or receives a disability, the insurance company repays the outstanding amount of the mortgage loan to
the bank, which does not impose an additional burden on his family. The borrowers relatives risk being left without home and money, having found themselves in a difficult life situation with no life insurance,” explains Gulzhan Dzhaksymbetova, the Chairman of the Board of Centras Kommesk Life.

Most of the financial institutions in Kazakhstan are currently offering their customers the life insurance contracts along with the loan; this can be not only mortgages, but any collateral loans, and consumer loans. “Financial institutions when granting the loans are actively cooperating with insurance
companies in order to reduce the financial risks, - says Zhanar Zhubaniyazova, the Board Chairman of Halyk-Life. - All borrowers should be aware that such an insurance contract is a voluntary type. No one has the right to push the insurance agreement upon the borrower. It is important, however, to keep in mind that any financial institution may set the terms for loan granting. And it is the borrower's choice to agree with such conditions or not when taking out a loan.”

Value of the matter

The value of insurance under mortgage is calculated individually in each case. On the one hand, the presence of such a policy increases the already considerable expenses of a borrower. On the other hand, banks with the guarantee of getting back their loan funds in any case, give a lower interest rate on the loan. “The policy cost depends on the loan amount and insurance rate. The tariff is formed with respect to the insured’s gender, age, profession and state of health,” clarifies the Board Chairman of Centras Kommesk Life.

When concluding a life insurance agreement under mortgage, it is important to carefully look at the list of agreed insured events, upon the occurrence of which compensation applies. As a rule, it is the client’s decease, as well as complete or partial loss of ability to work (disability group I or II) at the time of the insurance agreement. “The size of insurance coverage is equal to amount of principal debt under the loan agreement, thus, the maximum amount of payments cannot exceed the amount of principal debt of the borrower at the date of the insurance event,” explains the Board Chairman of Halyk-Life.

Why is this insurance type unpopular when getting loans?

Different banks may impose different extra conditions on the basic mandatory mortgage claims. This can be the borrower’s life insurance, title insurance, or increased interest rate on mortgage in case when the client refuses to take out life and title insurance. Each loan application is considered individually, so the potential borrower has the opportunity to discuss individual terms. “The
borrower often perceives the purchase of a life insurance policy as an extra cost. Besides, when taking a mortgage life insurance is long-term as it is issued for a period equal to the loan, - says Gulzhan Dzhaksymbetova. - However, it is appropriate to recall that in case of insurance event, the
insurance company will close the mortgage loan for the borrower.”

In case of early repayment of the mortgage loan, the client has the right to terminate the life insurance agreement. In this case, the insurance company will return the funds on contributions for outstanding period. “As a rule, when taking out a loan, a client looks only at the size of monthly payments, evaluates his financial capabilities but is not interested in additional conditions when getting such a loan, including insurance terms. And often, when an insurance event occurs, many borrowers and their relatives do not even know about the existence of an insurance contract, which in many cases can give them the opportunity to keep the collateral in the family or return the debt amount in case of unfavorable set of circumstances,” concludes Zhanar Zhubaniyazova.
Photos are from open sources.

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