Collective insurance: pros and cons

Collective insurance: pros and cons

Collective insurance: Barbara was going to take a loan. The bank promised to lower the rate if she insures her life and health. Varvara found this option to be beneficial, and she agreed. But it turned out that she was offered not to issue a separate policy, but to join the group insurance agreement for bank customers. We understand what are the features of group insurance and what pitfalls it is important to know about.

Banks are interested in borrowers insuring their life and health . Indeed, in the event of a serious injury or illness, disability or death of a client, problems may arise with repayment of the loan – and the insurance company will pay off the debt or part of it for the insured person.

Often, instead of buying an individual policy, banks offer borrowers to join a collective insurance agreement. They enter into an agreement with the insurance company in advance, and then simply enter their clients in this document.

What are the advantages and disadvantages of group policies?

Collective insurance, as well as individual insurance, allows not only to reduce financial risks, but in many cases, to reduce the interest on the loan. In some cases, a group policy may be cheaper than an individual one with the same set of risks.

When choosing collective insurance, all questions on insurance payments will have to be resolved through the bank in which you issued the policy. In some cases, this may be more convenient than contacting the insurer. For example, when you prefer to communicate with the manager in person, the bank office is next to you, but there is no representative office of the insurance company nearby.

But the collective agreement is the same for all clients. You cannot change many of its conditions for yourself, for example, reduce the cost of the policy through a deductible or choose an insurer. Although banks often allow customers to determine the list of insured events and the amount of the insurance payment themselves.

In addition, banks charge an impressive commission for connecting to a collective agreement, which sometimes reaches 80-90% of the cost of the policy. If you repay the loan early and the insurance is no longer needed, in many cases you will be able to return part of the cost of the policy – in proportion to the period remaining until the end of its validity. But the bank is not obliged to return its commission to you.

How much and in what situations will I be paid under the collective insurance contract?

As in the case of an individual policy, the list of insured events and the amount of payments must be specified in the terms of the contract. For example, it may be prescribed that in case of illness, the insurer will start making contributions for you only if the sick leave lasts for more than two months. And in case of complete disability, it will pay off all your debt to the bank.

Please note that if an insured event occurs, the owners of collective policies must submit documents for payment of compensation to the bank, and not to the insurance company.

How to cancel the collective policy if I change my mind?

When connecting to collective insurance, you can only cancel it through the bank that issued it. When terminating the contract, you can indicate in the application from which date the insurance should cease to be valid.

If you change your mind during the cooling off period , in  most cases the bank will refund you the full cost of the insurance, including their fees. For some types of policies, a little money will be deducted from the refund amount – for those days when the insurance worked. As a rule, the cooling period is 14 calendar days, but insurers sometimes prescribe in contracts a longer period.

By  law, after the cooling off period , you can only get a refund for collective insurance if all these requirements are met:

  • you have life or health insurance;
  • the bank connected you to the agreement after September 1, 2020;
  • insurance affects the terms of the loan agreement or provides for payments in favor of the bank;
  • you  repaid the loan early.

Some insurers may soften the conditions for a refund. For example, in case of early repayment of a debt, a part of the fee is returned not only for life and health insurance policies, but also for property insurance, which was collateral for a loan.

The amount of payment is proportional to the period remaining until the end of the policy. But the bank can withhold its commission for joining the collective agreement.

Varvara joined the collective policy for a year for 10,000$. 70% of them (7000$) was a commission to the bank. If, six months later, she wanted to repay the loan ahead of schedule and refuse insurance, then she would be reimbursed: (10,000 – 7,000) / 2 = 1,500$.

The money must be returned within seven working days after you submit an application to the bank to waive insurance in case of early repayment of the loan.

But if the insured event has already occurred, you definitely won’t return the policy fee, but you will receive insurance compensation. Most often, insurers send payments directly to the bank – and this money goes to repay the loan.

What else to look for when applying for insurance?

Please read the documents carefully before signing. The most important insurance conditions should be written in the memo , which the bank is obliged to issue to you before purchasing the policy. If any of the points is not clear to you, consult with the manager. Be sure to find out:

What kind of contract is offered  – individual or collective insurance.

Do I need to pay for insurance separately? Quite often, banks include the cost of the policy in the loan amount – and interest is also charged on it.

Does insurance affect the terms of the loan? Find out if the interest on the loan will increase if you cancel the policy. If so, evaluate both options for spending: it may be more profitable for you to pay a higher rate and not spend money on a policy. But do not forget that in this case you will be left without insurance protection.

List of insured events. See which risks are covered by insurance and which are not. There was a fairly wide list of exceptions in contracts concluded before October 1, 2022. But now the list of exceptions has become standard. Insurance companies may refuse to pay out only in certain situations:

  • when the insured event occurred due to alcohol, drug or toxic poisoning;
  • when a client, when purchasing a policy, hid information about tuberculosis, diabetes or another disease from the list of socially significant ones ;
  • when a person specifically arranged an insured event;
  • in emergency situations – for example, in conditions of military operations.

Reimbursement amount. Specify how much money you will be paid upon the occurrence of each insured event. For example, under the terms of some contracts, if you fall ill, the insurance company will pay for you not the entire monthly premium, but only a small part of it.

Conditions for early termination. Find out how much money will be returned to you if you decide to pay off the loan ahead of time and cancel the policy.

Weigh the pros and cons. So you will understand exactly whether you should connect to a collective agreement, buy an individual policy, or maybe take a risk and do without insurance.

The bank does not have the right to refuse you a loan just because you did not buy a policy. It is obligatory only to insure collateral real estate when applying for a mortgage.

If policies are imposed on you in other cases or their cost is included in the loan amount by default.



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