Mortgage Loan Insurance

The insurance offered to every applicant for a mortgage can be divided according to the fact whether it is mandatory or optional. And further into two groups which are related to the first division:

1. Property insurance for real estate that serves as a pledge for the bank

2. Life insurance for persons applying for a mortgage

Property insurance of pledged real estate is always required by mortgage banks. Life insurance is not obligatory (with certain mortgage banks’ exceptions). Let's look at it a little bit closer. At the first place, we will look at the property insurance for real estate and then separately at life insurance of applicants for the mortgage.

 

1. Property insurance

Mandatory property insurance for real estate is against natural events for most banks (fire, explosion, lightning strike, flood, windstorm or hailstorm). Mandatory insurance does not concern always the property which is financed by a mortgage, but that one which serves as pledge for the bank. Insurance means insurance of flat units, residential building or house. Only household insurance is not enough. Only Hypoteční banka is satisfied with just household insurance for residential units, which can be very frivolous with regard to potential risks. Generally, mortgage banks require setting the insurance amount either on the amount of the loan or the so called “replacement cost”.

I recommend firstly to identify how exactly is insured the whole apartment building and then either set insurance coverage to the minimum of insured amount - the replacement cost, or to the market price.

For the family houses is a good idea to set the insured sum to the value at which it would be possible at the moment to buy the same or a comparable real estate. This value, called "replacement cost", should correspond to the price of materials and construction work on the rebuilding on the same place. You can state the replacement cost for example according to the expert valuation. When the insurance sum is set lower than the "replacement cost" of real estate, we call it “underinsurance”.

In that case, you risk that the compensation will not be paid out to full extent.

 

Price comparison of the family house and housing units insurance:

2. Life insurance

Based on what kinds of risky situations are covered by insurance, you can generally distinguish the following three options (levels) of the credit insurance:

 

Insurance in case of death and total and permanent disability

Insurance in case of death, permanent disability and incapacity for work

Insurance in case of death, permanent disability, incapacity for work and loss of job

If any of these risk situations arises, the insurance company pays the client for a certain period the repayment of a mortgage loan, or in the case of death or disability pays at once all the outstanding part. Monthly insurance premium ranges from about 3% to about 7% of the monthly instalments on credit.

 

Who should be insured?

The insurance of mortgage loan (or mortgage instalments) should definitely consider the family breadwinner or the person whose absent income will threaten an existential minimum of the family. On the contrary, the person who pays the mortgage loan in connection with the acquisition of real estate as an investment, such insurance may not be so important. However, it is always important to conduct a thorough analysis and solve the appropriate financial situation conceptually within the personal financial concept for the client.

Monthly instalments for specific mortgage banks