Single premium insurance
Banks frequently offer many types of insurance to their customers and may sometimes require guarantees in the form of insurance for purchasing a financial product. This is common in the case of mortgage loans, as we explained here.
Today we want to talk to you about a very specific practice relating to the way in which institutions market insurance associated with financing products, in both mortgage loans and consumer loans: single premium insurance. This may occur in the case of insurance that guarantees the payment of amounts borrowed, such as payment protection insurance in the event of temporary disability or unemployment, or life insurance whose beneficiary is the financial institution, with the aim of covering the unpaid amounts in the event of the debtor’s permanent disability or death, for example.
Unlike regular premium insurance, the full cost of the insurance for the entire insurance term is paid at the start of the transaction. In many cases, the cost of the premium is even included in the principal amount of the transaction, thus increasing the amount of the capital requested. For example, if you request €20,000 to carry out work on your home and you take out financed single premium life insurance with a cost of €3,000, the total amount of the loan you will sign will be €23,000. In these cases, as the capital borrowed is higher, you will pay more interest, as well as a higher arrangement fee for the actual transaction, in addition to an increase in the premium as the insured capital increases. Therefore, your level of indebtedness will also be higher.
Institutions are obliged to be completely transparent about the characteristics of the insurance, to offer you comprehensive and clear pre-contractual information and always, in the event that taking out insurance is mandatory, to include its cost in the APR calculation, so that you can make a correct comparison with other institutions’ offers.
Other aspects to be taken into account:
- As in any other insurance, the policyholder has the right to cancel the policy within 30 days of taking out the policy, without any type of penalty and without needing to state the reasons. Therefore, do not sign the insurance policy without knowing who the policyholder is; in some cases you take out a policy in which the policyholder is the institution itself, so it may be more complicated to exercise this cancellation right.
- If taking out insurance is mandatory in order to access financing, the lender is obliged to accept alternative policies that the client proposes to take out, as long as they offer equivalent conditions and benefits to those proposed by the lender.
- Find out what the policy’s period of coverage is. It is possible that, in the case of long transactions, such as mortgage loans, the insurance coverage may not cover the entire repayment period.
- As with any other insurance, you must understand exactly what cover it offers you, and whether it is adapted to your specific personal situation; sick leave or unemployment are circumstances that are not going to occur if you are living on private income or if you are unemployed, a pensioner or a civil servant, so taking out the policy would not make sense in this case.
- In the event of the total early cancellation of the financing, what usually happens as well is that you cancel the insurance and they refund the unconsumed premium (rebate). It is also possible, in the case of life insurance, that you might want to keep the insurance. If this is the case, don't forget to change the beneficiary, removing the financial institution and adding yourself or whoever you decide.
- With renewable annual premium insurance, it is easier to cancel and switch to another company that offers you a better deal, always taking into account the advance notice requirements in the policy. The comparison of the cost of coverage with annual premium insurance and with financed single premium insurance is complex; you should bear in mind that, in the case of life insurance, annual premiums go up as the borrower's age increases, but the outstanding capital on which the premium is calculated becomes lower and lower, so the premium decreases.
As always, information is your main ally. Make sure you fully understand the characteristics of what you are being offered and its cost so that you make a sensible decision about what to do with your finances.