Loan Insurance: What You Should Know

Many people in Switzerland get loan insurance along with their personal loans. But is loan insurance worth the cost? Independent online comparison service moneyland.ch answers the most important questions here.

1. What is loan insurance?

Many Swiss lenders recommend loan insurance when you get personal loans and credit cards. You may also be offered loan insurance when you use installment plans to buy electronics and other consumer goods. Loan insurance is also offered for car leasing and other leasing solutions.

Loan insurance is also called loan protection insurance or payment protection insurance.

Loan insurance covers some of your monthly loan payments under certain circumstances. Covered hazards may include losing your job or becoming disabled. The exact coverages vary between individual loan insurance offers.

2. Which lenders offer loan insurance?

Practically all Swiss lenders give you the option of getting loan insurance when you take out personal loans. Lenders which offer loan insurance include bob credit, Credit-now, Cashgate, Cembra Money Bank, good finance and Lend, among others. Migros Bank is an exception: It does not offer optional loan insurance.

3. Which insurance companies underwrite loan insurance?

Swiss lenders do not offer their own loan insurance. They simply sell loan insurance in exchange for sales commissions. The actual insurers which underwrite Swiss loan insurance offers are companies like Axa, Chubb, Helvetia and Generali.

4. Which risks are covered by loan insurance?

Loan insurance does not cover everything which could possibly go wrong with a loan. The insurance will not make your payments for you just because you do not have the money to make them yourself.  

As a rule, loan insurance only covers your payments if: you lose your job and are not responsible); you are temporarily unable to work due to a prolonged illness or accident; you become permanently disabled. Some insurance offers cover all three of these hazards, while others only cover one or two. A handful of insurers also cover loan payments if you divorce.

Important: There are many specific situations which are excluded from coverage. For example, even if a loan insurance offer covers permanent disability, it still will not cover your loan payments if the cause of your disability is excluded from coverage. Even for hazards which are covered, you have to pay attention to qualification periods and waiting periods. You should also look at the maximum monthly payment which the insurance will cover, and the maximum length of time over which the insurance will cover your payments.

5. How am I insured for unemployment?

Becoming unemployed is probably the biggest worry most people have when they get loan insurance. But be careful because coverage for losing your job generally excludes a long list of hazards!

The insurance only comes to your aid if you are not responsible for losing your job. If you quit your job, your payments will not be covered. If you are self-employed, you will not be eligible for most loan insurance offers at all.

Additionally, you have to be receiving benefits from Swiss unemployment insurance (ALV). Other requirements: Depending on the loan insurance offer, your payments may only be covered if you worked at least 20 hours per week for at least half a year or even a full year before losing your job.

In most cases, the insurance does not begin to cover your loan right away, but only after a qualification period. This is typically three months, though two-month qualification periods also exist. If you lose your job before the insurance coverage takes effect, your payments will not be covered.

On top of that, there is also a waiting period which applies from the time you become unemployed. Depending on the insurance you use, you may have to wait until one month, two months, or even three months after you lose your job before the insurance begins to cover your loan payments.

Limitations also apply to the amount of money which is covered. With most loan insurance offers, the limit is between 1500 and 2000 francs per month, with a few covering up to 2500 francs – and payments are often only covered for 12 months from the time you lose your job. Some insurers only cover your payments for up to nine months per incident.

Even when the insurance company agrees to cover your payments after you become unemployed, that does not necessarily mean that your full outstanding loan is covered. If, for example, your monthly payment is 1000 francs, many insurance offers will only cover up to 12,000 francs – or 12 monthly payments – if you lose your job.

There are also limitations which apply over the full life of your loan. These apply, for example, if you lose your job several times over the loan term. Most insurers limit coverage to a maximum of 24 or 36 monthly payments for all incidents over the full loan term combined.

6. How am I insured for temporary invalidity?

Temporary invalidity is the inability to earn an income over a limited period of time because of an accident or illness. For example, if you cannot work while recovering from an accident, then the insurance covers your loan payments.

But here too, there is generally a waiting period of 30 or 60 days from the time you become unable to work before the insurance begins to cover payments.

The same limitations apply as with unemployment. The insurance covers up to a maximum of between 1500 and 2500 francs of your loan payments per month, for up to between nine and twelve months, depending on the offer.

Temporary disability generally is not covered if it results from extreme sports, drug or alcohol consumption, psychological issues, and conditions which you already had when you got the insurance.

7. How am I insured for permanent disability?

If you become permanently disabled and have a social disability insurance (DI) rating of at least 70 percent, then loan insurance typically pays out a lump-sum towards settling your debt.

There is generally a waiting period of 30 or 60 days from the first medical consultation. The insurance pays out a benefit shortly after. There is generally a limit on the maximum amount the insurance will pay towards covering your outstanding loan. Depending on the insurance offer, a maximum of between 60,000 and 100,000 francs of your remaining loan will be covered.

Important: Some insurers specifically exclude disability which results from serious illnesses. Other insurers have very long waiting periods of up to 180 days from the time you become disabled or go for your first medical consultation.

Permanent disability resulting from extreme sports, drug and alcohol consumption, psychological problems, or pre-existing health conditions is generally not covered by loan insurance.

8. How is my loan insured if I die?

If you die before your loan is fully repaid, your heirs can choose whether or not to take over your debt along with the rest of your estate. In order to protect themselves from losing their money if you die, most lenders require you to get loan insurance for this risk. Many Swiss lenders automatically include the premiums for this life insurance in their interest rates. In this case, you do not need additional loan insurance to cover death.

But there are some lenders which do require you to get this insurance separately – meaning you pay insurance premiums in addition to the loan costs. The personal loan comparison on moneyland.ch lets you filter loan offers based on whether or not life insurance is already included in interest rates.

If you die before your loan has been repaid, the insurance repays what is left of your loan, up to a maximum of between 80,000 and 100,000 francs, depending on the insurance used. Here too, there are exclusions. For example, if you die as a result of practicing extreme sports, the insurance will not pay out a benefit.

9. What does loan insurance cost?

Insurance premiums vary between Swiss lenders, but are normally equal to between 4 and 8 percent of your monthly loan payment. That means getting loan insurance can increase the costs of a loan by more than 50 percent!

Some insurers charge higher or lower premiums depending on how good your creditworthiness is. You pay higher premiums if you do not have excellent creditworthiness. This is the case with the loan insurance from Credit-now, for example.

Insurance premiums are not normally included in the advertised loan costs. You pay premiums in addition to interest. Life insurance for loans is an exception to this rule: with many lenders, the advertised cost of loans includes the cost of life insurance.

Example: You get a 50,000-franc personal loan at 9.95 percent annual interest and a 60-month loan term. Without loan insurance, your monthly payment would be 1051 francs. The total cost of interest over the full loan term would be 13,039 francs. You can confirm this using the moneyland.ch loan calculator.

Loan insurance would cost you around 80 francs per month. That comes to 4800 francs over the full loan term! The total cost of your loan with insurance in this example would be nearly 18,000 francs. That means insurance would increase the cost of your loan by nearly 40 percent.

10. Is loan insurance worth getting?

In most case, buying loan insurance is not worth it.

Reason: The cost is just too high for the insurance coverage you get. Another reason is that loan insurance will only fully cover your outstanding debt in exceptional cases because there are so many exclusions and limitations.  

As a general recommendation, loan insurance is best avoided.

11. What should I do if I still want to insure my loan?

If you still want to get loan insurance, take time to study the insurance terms and conditions before signing up. Doing this will help prevent any unpleasant surprises – such as the insurance only providing limited coverage if you become unemployed.

Be skeptical. Many insurers and lenders only promote loan insurance because it is very lucrative for them.

12. Is there a minimum insurance term?

Yes. Depending on the lender, you can only insurance loans with terms of at least six, twelve, or even 18 months.

13. Can I get loan insurance for a loan that I already have?

This is possible in many cases. Some lenders let you insure your loan up to 3 months after you get it. After that, you will no longer be able to get loan insurance.

14. Can I terminate a loan insurance before my loan is repaid?

Yes, you can suspend optional loan insurance at any time. Notice periods range between one and three months.

If you already have loan insurance for an ongoing loan, consider reviewing the costs and coverage of your loan insurance again. In many cases it is worth terminating your insurance to cut the cost of your loan.

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