Borrower insurance: how to protect yourself well while limiting costs?

When taking out a mortgage, the lending institution will systematically require the simultaneous subscription of borrower insurance, although this is not required by any legal provision. This will be less frequently the case for a consumer credit. Such a contract may seem unnecessary, but it will be your way out in the event of a life event that jeopardises your repayment capacity. Let us look in detail at what this insurance is for, and how you can limit its impact on your budget.

The role of borrower insurance

It guarantees the cover of all or part of the repayment instalments or the remaining capital owed to a bank after taking out a loan, in the event that a force majeure event prevents the borrower from honouring the remaining monthly payments. Conventionally, the insurance therefore covers:

• the death of the borrower(s);
• total and irreversible loss of autonomy;
• permanent disability depriving the borrower of their means of subsistence;
• temporary incapacity for work;
• loss of employment if the option is taken out.

This insurance is a useful security, and not only for the bank: in the event of job loss or a disabling accident, the borrower will no longer have to worry about their debt. Similarly, in the event of death, the heirs will not have to repay their parent’s debt.

At the subscription stage, a health questionnaire must be completed, which the insurer will use to determine the amount of the insurance premium based on the calculated risk. It is also possible to receive a flat-out refusal.

The guarantees actually provided

Let us provide some useful details to know about the cover for each event disrupting the normal repayment of the loan taken out.

Death

Its occurrence, whatever the cause, is always covered by an insurance contract, but it is nevertheless subject to an age limit beyond which it will no longer apply. Consequently, death may not be covered for the entire repayment period. If it occurs and is covered, the insurer will pay the lender the remaining capital outstanding on the day of death.

Total and irreversible loss of autonomy

The borrower must meet three cumulative conditions to trigger this guarantee:

• they must be in total and definitive impossibility of carrying out any paid activity,
• they must be required to call upon a third party for the performance of three, or all four, ordinary acts of daily living (dressing, washing, eating, moving about),
• they must not have reached the age limit stipulated in the contract.

While obtaining a third-category disability pension is in practice often required, it is not synonymous with automatic triggering of the guarantee. Each insurance contract sets its own rules!

Permanent disability

This is a total or partial inability to work, but lasting in both cases. According to the clauses in the contract, to benefit from it you must:

• be declared totally (or partially) unfit to exercise any activity capable of generating earnings and profits,
• or be declared totally (or partially) unfit to exercise the activity you were carrying out on the day of the incident.

In practice, a disability rate of at least 66% is required to trigger total disability, and more than 33% to guarantee partial disability, which is not offered by all contracts.

Temporary incapacity for work

Prolonged sick leave due to illness or accident may lead the insurer to consider that you are temporarily unfit to exercise your professional activity, and in other cases to exercise any professional activity. The insurance can then take over your repayments, according to the conditions set out in the contract. Note that a clause may provide for continuation of cover in the case of a return to therapeutic part-time work, but this remains rather rare.

Attention: it is not always necessary to be exercising a professional activity on the day of the claim to qualify for this cover. An event occurring in the life of a retired person or a homemaker, for example, may in some cases be covered: it is worth checking the clauses of the contract.

Loss of employment

The conditions for qualifying for this guarantee can be various and should be negotiated at the outset according to your situation. While dismissal and the receipt of unemployment benefits from Pôle Emploi are generally required, be aware that the insurer is also likely to implement a waiting period or qualifying period. Furthermore, the intervention of this guarantee is always limited in time.

Key points to note in the borrower insurance contract

While it is tedious to read all the lines of a contract spanning several pages, it is strongly advised to carefully go through those of a borrower insurance contract. Waiting periods, deductible thresholds or exclusions of guarantees related to health declarations can indeed have a determining impact on your situation during the term of the contract.

Check that the age limits for invoking the guarantees suit you, and that no limitation is likely to cause you a costly disappointment.

Finally, the cover method may be flat-rate (the compensation will be equal to the amount of the monthly payment) or indemnitary (it will be based on the loss of income).

Reducing the cost of borrower insurance

Now that you have the information to decide which guarantees will be essential to you, let us see how you can, quite legitimately, try to reduce the cost of your borrower insurance.

Insurance often imposed by the lending institution

Aware of their power at the time of taking out a mortgage, banks have got into the habit of imposing conditions on their agreement and commonly, of strongly encouraging the subscription of home insurance or borrower insurance from their services or partners.

While your acceptance of the latter cannot officially condition the granting of the loan in accordance with the provisions of the 2010 Lagarde Law, the bank’s refusal to make you an offer does not have to be justified and in practice, can therefore result from your lack of cooperation.

If you feel compelled to accept your bank’s offer to make your project a reality, know that you will not be a prisoner of it thereafter. Note that if the insurance subscribed is that of your bank, its cost will be integrated into the Annual Percentage Rate of Charge (APRC) and you will find its breakdown in your amortisation schedule.

Choosing your insurance is your right!

If the borrower insurance offered by the bank does not suit you and your project is accepted, do not hesitate to request an insurance delegation. Through this mechanism, another insurer of your choice will send an insurance delegation to the bank providing the loan, before the funds are released for your benefit.

Attention: this contract must offer guarantees at least equal to those of the bank’s group contract. Your bank cannot legally refuse the delegation, and it is prohibited from increasing the loan rate or other fees to compensate for the loss of this product.

After taking out the loan, the 2014 Hamon Law grants the right to proceed with an insurance delegation at no cost for 12 months. This facility aims to discourage banks that would put pressure on applicants. Beyond one year, any borrower insurance can be cancelled in favour of another every year, on the anniversary date of the subscription. To be certain of benefiting from this, be sure to send a registered letter at least two months before the expiry date of the insurance contract.

When taking out borrower insurance, above all ensure that the guarantees present cover the risks you can anticipate given your situation. Thereafter, vigilance remains essential, and it is generally useful to proceed at least once with a change of insurance capable of bringing substantial savings. Borrower insurance generally represents more than 10% of the total cost of the loan, and several thousand euros can sometimes be saved by playing the competition!