Life insurance is not compulsory with a mortgage, but the discount can pay off

No law requires life insurance with a mortgage; the only compulsory insurance is on the pledged property. Banks do, however, cut the interest rate, usually by a few tenths of a percentage point, if you take out their own life insurance or a partner insurer's, and that is why most clients sign it. The real question is therefore not whether you have to, but whether the discount is worth more than the premium.

On a CZK 4,000,000 mortgage over 25 years, a 0.2 pp discount (5.20 % → 5.00 %) cuts the payment by CZK 468 a month, or CZK 28,080 over a five-year fixed-rate period. If the bank's policy costs less than that and you would buy cover anyway, take it. If it costs more, or you do not need the cover, the discount is expensive. Below is how to work it out and what to avoid, above all investment life insurance.

What the bank can require and what it only offers

The Consumer Credit Act (No. 257/2016 Coll.) lets a bank make a loan conditional on an ancillary service, provided it says so clearly in the pre-contractual information and includes the cost in the APRC (RPSN, the annual percentage rate of charge). For mortgages that works out as follows.

• Property insurance is required by every bank, because the property is the collateral. Any insurer will do, as long as the policy is assigned to the bank. See our article Property insurance for a mortgage.
• Life insurance is not a condition of the loan. Banks use it for a rate discount (bonifikace): take it and you get a lower rate; decline and you still get the mortgage, only at a higher price.
• Payment protection insurance (job loss, sick leave) is often part of the package, but it is a different product with different exclusions, covered in our article Payment protection insurance.

There is one case where insurance becomes effectively necessary. For a riskier application, typically a single applicant with a high payment-to-income ratio or an older applicant, the bank may insist on it. Even then it usually accepts your own policy with an assignment rather than requiring its own product.

What life insurance is enough for a mortgage?

Only risk (term) life insurance (rizikové životní pojištění) makes sense with a mortgage. You pay only for cover against the risks, nothing is saved, and the premium is correspondingly low. Investment and endowment policies combine cover with saving: much of the first years' premiums goes on fees and initial costs, the return tends to be worse than investing separately, and cancelling early costs money.

If an adviser offers you an investment product to get the rate discount, ask whether the bank also accepts plain term cover. It almost always does.

When does the life insurance discount pay off?

The decision comes down to comparing three options. Always calculate for the whole fixed-rate period, because the discount conditions and the price of the policy may change at refixation.

The APRC belongs in the comparison too. If insurance is a condition of the discount, the bank must include it in the APRC, which is why two offers at the same rate can show different APRCs. Our article APRC vs. interest rate explains why. You can check payments at different rates in the payment calculation.

What to insure, and for how much

Insurance with a mortgage has one job: to make sure the debt is not left to your survivors, or with you if you can no longer work. That decides what belongs in the policy.

• Death is the basis. The sum insured should cover the loan balance, or the share of it attributable to that borrower.
• Disability matters more in practice than death, because it is more likely and the debt stays with you. Check from which degree of disability the policy pays; cover for the 3rd degree only is weaker.
• Sick leave (pracovní neschopnost) cover makes sense for the self-employed (OSVČ) and people without a cash reserve. Look at the waiting period and whether the payout covers the instalment.
• Critical illness and injuries with permanent consequences are add-ons, not a substitute for disability cover.

For death you can choose a decreasing sum insured that tracks the loan balance. On a CZK 4 million mortgage over 25 years at 5.00 %, the balance is about CZK 3,543k after 5 years, CZK 2,957k after 10 years, CZK 2,205k after 15 years and CZK 1,239k after 20 years. A decreasing sum is cheaper and enough to clear the debt, while a level sum also protects the family beyond the mortgage.

Two borrowers with different incomes do not need the same cover. Insure more heavily the one whose income the payment cannot do without.

Who receives the payout

A bank that gives a discount for insurance, or requires it, usually wants the payout assigned (vinkulace) in its favour. If an insured event occurs, the insurer pays the bank directly, up to the amount of the debt, and the beneficiary gets the rest. Your survivors then inherit the property free of the lien, or with a smaller balance, rather than the debt.

What to watch out for:

• The assignment covers only the risks tied to the debt, typically death and disability. Payouts for injury or sick leave usually go to you.
• If you refinance with another bank, the assignment has to be transferred, or the new bank will not recognise the discount.
• Once the mortgage is repaid, ask for the assignment to be cancelled; it does not lapse by itself.

When you can drop the insurance

The loan agreement usually requires you to keep the insurance for as long as you enjoy the discount. Cancel the policy and the bank raises your rate by the amount of the discount, sometimes from the following month, sometimes only from the next fixed-rate period; the exact wording is in the clause on rate discounts or in the price list. Cancelling is not normally grounds for calling in the loan, but it does trigger the penalty increase in the rate.

1. Before signing, read how much the rate rises, and from when, if the insurance ends.
2. The end of the fixed-rate period is the best time to reassess. The bank must tell you the new rate at least 3 months in advance, and you can renegotiate the terms, insurance included, or refinance free of charge.
3. Before switching to a cheaper policy elsewhere, ask whether the bank will recognise another insurer's policy with an assignment. If it will, the discount stays and the old policy can go.

A term policy can be ended without loss, because the cover simply stops. With investment insurance, early cancellation would cost part of the accumulated value, which is one more reason to keep it away from a mortgage.