Loan insurance: when it protects you and when it only raises the APR

The question to ask first

It is not "how much does the insurance cost", but: without this insurance, will I get the same loan on the same terms? Everything depends on the answer - including whether you can see the cost of the policy in the APR at all.

The Polish Consumer Credit Act counts towards the total cost of the loan the costs of additional services too, if incurring them is necessary to obtain the loan or to obtain it on the terms offered. In practice that means:

• Compulsory insurance - no insurance, no loan. The premium must be in the APR (RRSO). You can see it in the figure in the agreement.
• "Optional" but rewarded insurance - without it you still get the loan, only more expensive (a higher margin, a higher fee). That is still a condition of getting the loan on the terms offered, so it is also included in the APR.
• Truly optional insurance - it changes neither the decision nor the price of the loan. It is not included in the APR. And this is the sneakiest version: you compare two offers by APR, and in one of them PLN 8,000 of premium is invisible. Either you add it yourself or you are comparing apples with pears.

Three ways a bank adds the premium on

Let's take one loan and work it out four times: without insurance and in three versions of adding it on. The same base terms everywhere - PLN 100,000, interest 7.50%, 60 fixed instalments - and the same premium of PLN 8,000 everywhere (except the monthly version).

Before we go any further - notice that the instalment does not tell the truth here. The version with the deducted premium has the lowest instalment of the insured ones (PLN 2,003.79, exactly the same as the loan with no policy) and at the same time the highest APR in the whole table. No surprise: the instalment is the same, but you get PLN 92,000 in hand instead of PLN 100,000. You pay as if for a hundred thousand, but you borrow ninety-two.

The most expensive version: interest on the insurance

Look again at the "financed premium" row. The bank adds PLN 8,000 to the loan amount, so you sign an agreement for PLN 108,000, even though PLN 100,000 lands in your account. And interest is charged on those 108 thousand.

The insurance cost PLN 8,000, but you will pay PLN 9,618.22 for it. The extra goes not to the insurer but to the bank - as interest on an amount you never saw in your account. It is the same arithmetic that makes a financed arrangement fee more expensive than one paid in cash.

If you have PLN 8,000 in savings and the bank gives you the choice - pay the premium from your own money. If you do not and have to finance it, at least know what that convenience costs.

What this policy actually covers

"Loan insurance" is a trade name, not a legal one. Products with very different scopes are sold under that label - and it is the scope that decides whether the policy is real protection or just an item in the cost of the loan:

• Life cover - if the borrower dies, the insurer repays the remaining capital. The most sensible part, and the easiest to price.
• Permanent incapacity for work - it works, but usually only at a high threshold of medical certification. "Inability to do your current job" and "total inability to work" are two completely different policies.
• Job loss cover - usually the weakest element. Typical limitations: a benefit only if you are dismissed through no fault of your own (not when a fixed-term contract simply ends), a waiting period of several months from taking out the policy, payouts for a limited number of instalments.
• Low down payment insurance (on a mortgage) - it protects the bank, not you, even though you pay for it. It ends when the loan balance falls below a set threshold of the property's value - something the bank does not always remind you of on its own.

When insurance makes sense

It does - and the point is not to always say no. Life cover on a mortgage is one of the few situations where the cost is genuinely justified. It is worth considering when both of these conditions are met:

• The amount is large and the term is long. With PLN 400,000 over 25 years, the risk that something happens in that time is not theoretical. With PLN 8,000 over 12 months - it is.
• Someone would be left with the debt. If you are the sole breadwinner, or you are taking the loan jointly and one salary could not cover the instalment, the policy does exactly what insurance is for: it turns a catastrophe into an expense.

In that situation, though, do one thing: compare the bank's policy with an individual term life policy bought outside the bank. Banks' group insurance can be convenient but is rarely the cheapest - and with a mortgage you can usually provide your own policy assigned to the bank.

When it makes no sense

• You already have life insurance with a sum large enough to cover the debt. A second policy does not double your protection, only the cost.
• The loan is short and small. 12-24 months and an amount your family could repay from savings - then the cheap protection is a cash reserve, not a policy.
• Your situation falls within the exclusions. A fixed-term contract, self-employment, work abroad - check whether job loss cover would work at all. If not, you are paying for a benefit you will not get.
• The financed premium eats up more than the risk. If, as in the table above, insurance raises the cost of the loan by half, it is no longer a decision about safety - it is a decision about price.

Early repayment: part of the premium comes back

If you repay the loan early, cover for the remaining period stops - and since it no longer applies, you should not pay for it. For a consumer loan, Art. 49 of the Polish Consumer Credit Act requires the total cost of the loan to be reduced proportionally, and the Court of Justice of the EU in case C-383/18 confirmed that the reduction covers all costs, not just interest.

In practice: you will find the premium refund rules in the OWU, and you submit your claim in writing - to the bank and, if the bank is the policyholder, to the insurer as well. We describe the whole mechanism and the formula for working out the amount in a separate article: early repayment and fee refunds.

Work it out yourself

Read also

• APR or interest rate - why a "0%" loan with a fee has an APR of 21.83% and why a lower interest rate can be more expensive.
• Early repayment and fee refunds - how much money the bank should give back to you and how to claim it.
• A mortgage step by step - where insurance comes into the process and what you can still negotiate.

All the numbers in this article were calculated with the engine that powers our calculators (js/finance.js), assuming fixed instalments and a fixed interest rate. The PLN 8,000 premium and the 7.50% rate are a worked example, not an offer from any institution. This text is educational and does not constitute insurance or investment advice, nor an offer within the meaning of Art. 66 §1 of the Polish Civil Code.