What are the advantages and disadvantages of mortgage insurance?
Mortgage insurance can help protect the financing of a home in the event of death, disability, serious illness or a temporary loss of income. In Switzerland, however, it is not a single standardised product: depending on the policy, it may be term life insurance, disability insurance, payment protection insurance or a life insurance policy.
Briefly explained
Mortgage insurance is generally not a legal requirement for obtaining a mortgage in Switzerland. The term refers to different types of protection that may provide benefits in the event of death, disability, illness or, in some cases, unemployment. The insurance does not replace the required equity, affordability assessment or amortisation. The insured amount, covered events, waiting periods, exclusions, beneficiaries and total costs are decisive.
What is mortgage insurance?
The terms mortgage insurance and mortgage protection insurance are not always used consistently in Switzerland. They do not normally refer to insurance for the property itself, but to personal protection for mortgage borrowers and their family members.
The insurance is intended to prevent an insured event from immediately making it impossible to pay mortgage interest, amortisation or ongoing housing costs.
Possible insured events
- death of an insured person,
- long-term incapacity for work,
- full or partial disability,
- certain serious illnesses,
- involuntary unemployment where expressly included,
- other contractually defined losses of income.
The term residual debt insurance may also be misleading. Some policies pay an agreed lump sum following a death. Others pay individual mortgage instalments for a limited period. Other products provide a disability pension that the household may use for the mortgage and general living costs.
Which types of mortgage protection are available?
1. Term life insurance
Term life insurance pays an agreed lump sum if the insured person dies. The money can be used to repay all or part of the mortgage and thereby reduce the ongoing financial burden on the surviving family members.
The insured amount may remain unchanged throughout the policy term or decrease in line with the expected outstanding mortgage.
2. Disability insurance
Disability insurance provides a pension or lump sum if the insured person meets the contractual definition of disability. The benefit can help pay mortgage interest, amortisation, maintenance and other living costs.
Particular attention should be paid to:
- the definition of disability,
- the required minimum degree of disability,
- the waiting period before benefits begin,
- the amount and duration of the pension,
- coordination with disability insurance, the pension fund and other policies.
3. Incapacity-for-work insurance
Incapacity for work often refers to whether the insured person can continue working in their previous occupation for health reasons. Disability, by contrast, assesses the extent to which the person can still earn income in the broader reasonable labour market.
This distinction may be decisive for the payment of benefits and must be carefully checked in the policy conditions.
4. Payment protection in the event of unemployment
Payment protection insurance may pay an agreed amount or individual mortgage instalments for a limited period if the insured person becomes involuntarily unemployed.
Such policies frequently contain restrictions:
- a qualifying period after the policy begins,
- a waiting period after unemployment begins,
- a limited number of insured monthly instalments,
- a maximum monthly benefit,
- exclusion of voluntary resignation,
- restrictions for self-employed and fixed-term employees,
- exclusion of redundancies that were already foreseeable.
5. Critical illness insurance
Critical illness insurance pays a lump sum following a precisely defined diagnosis. Not every serious illness is automatically insured. The illnesses and medical criteria listed in the policy are decisive.
6. Life insurance with a savings component
Endowment life insurance combines insurance protection with a savings process. The policy may be pledged or assigned to the financing bank as part of indirect amortisation.
This arrangement may offer tax and planning advantages, but it is frequently long-term and less flexible. If the policy is terminated early, its surrender value may be substantially lower than the premiums paid, particularly during the early years.
Swiss legal and financing position
No general insurance obligation
Private mortgage borrowers are generally not legally required to take out mortgage insurance. Whether a bank requires term life or other risk protection in an individual case depends on the financing structure, affordability, the people involved and the bank’s internal lending conditions.
Financing requirements apply independently of the insurance
Mortgage insurance does not replace equity and does not automatically make a financing arrangement affordable. The bank continues to assess income, financial obligations, loan-to-value ratio, property value, amortisation and long-term affordability.
| Financing issue | Effect of mortgage insurance |
|---|---|
| Equity | Risk insurance does not generally replace the required equity. |
| Affordability | The financing must be affordable before an insured event has occurred. |
| Amortisation | The required repayment of the mortgage remains applicable. |
| Loan-to-value ratio | The insurance does not alter the property’s lending value as determined by the bank. |
| Interest-rate risk | Ordinary increases in mortgage rates are not normally an insured event. |
| Maintenance | Renovations and ongoing building maintenance are not normally covered. |
Under the recognised minimum requirements for mortgage financing, part of the equity must come from funds that have not been withdrawn or pledged from the second pillar. The mortgage must also generally be amortised to two-thirds of the lending value within no more than 15 years.
Indirect amortisation using pillar 3a assets or pledged life insurance policies is possible. However, this closely connects the mortgage, pension provision and insurance policy.
Insurance Contract Act and policy conditions
Swiss insurance contract law, the policy and the general insurance conditions determine the scope of protection. Benefits are only paid for risks that are genuinely included in the contract.
During a health assessment, all questions asked in writing should be answered fully and truthfully. Incorrect or incomplete information may endanger the insurance cover.
Advantages of mortgage insurance
1. Protection for the family following a death
If an important income is lost entirely, the affordability of the property may be jeopardised. A sufficiently high death benefit can reduce the mortgage and thereby lower the monthly financial burden.
2. Greater chance of retaining the home
Without protection, death or permanent disability may result in the house or apartment having to be sold. An insurance benefit can provide time and financial flexibility so that family members are not placed under immediate pressure to sell.
3. Protection of financial obligations
Depending on the product, a lump sum, ongoing pension or individual instalments for a limited period may be paid. This can help continue paying mortgage interest and other housing costs despite a loss of income.
4. Individually adjustable protection
The insurance can be adapted to the personal situation using factors such as:
- the outstanding mortgage,
- the number and age of children,
- each income’s contribution to the household budget,
- existing pension benefits,
- financial reserves,
- planned amortisation,
- the required protection period.
5. Supplementing existing pension benefits
Benefits from state pension insurance, disability insurance, accident insurance and pension funds are not always sufficient to continue paying the mortgage and living costs without adjustment. Private protection can specifically close an existing provision gap.
6. Psychological and financial planning security
Knowing that the family or property financing is protected following a serious event can make long-term planning easier. This requires the insured amount to be realistic and the most important risks to be genuinely covered.
7. A decreasing insured amount may reduce costs
If the mortgage is amortised over time, a decreasing death benefit may be appropriate. The protection then approximately follows the declining outstanding debt and may be less expensive than an insured amount that remains constant throughout the term.
Disadvantages of mortgage insurance
1. Additional recurring costs
The premiums are payable in addition to mortgage interest, amortisation, service charges, insurance and maintenance. The total cost over a long policy term may be considerable.
2. Exclusions and restrictions
The insurance cover is not unlimited. Possible restrictions include:
- exclusion of certain pre-existing conditions,
- benefit exclusions for previously known medical conditions,
- qualifying and waiting periods,
- limited benefit duration,
- a minimum degree of disability,
- a limited number of covered monthly instalments,
- exclusion following voluntary resignation,
- special rules for mental health conditions,
- geographical or occupational restrictions.
3. The health assessment may lead to exclusions
Age, health, occupation and leisure risks influence acceptance and the premium. The insurer may charge an additional premium, exclude certain medical conditions or reject the application.
4. The benefit may be lower than the outstanding debt
A fixed or decreasing insured amount does not automatically correspond to the outstanding mortgage at all times. An increase in the mortgage, renovation financing or slower amortisation may create a protection gap.
5. Unemployment is often only covered to a limited extent
Even where unemployment is included, only a limited number of monthly instalments up to a maximum amount are often covered. Long-term unemployment is therefore not fully protected.
6. Overlap with existing insurance
A household may already have sufficient protection through the pension fund, employer, accident insurance, existing life insurance or private disability insurance. An additional policy may create expensive duplicate cover.
7. Contractual commitment and limited flexibility
If the mortgage changes, the property is sold or a couple separates, the original insurance may no longer be suitable. Early changes to long-term savings or life insurance arrangements can be particularly expensive.
8. Dependence on the insurer’s claim decision
Whether an insured event has occurred is assessed using the policy conditions and required evidence. Investigations may be necessary between the event and the payment of benefits.
9. No protection against every financial risk
Mortgage insurance does not normally cover higher mortgage rates, expensive renovations, falling property values, divorce or a voluntary reduction in working hours.
10. Incorrect beneficiary arrangements may defeat the purpose
If the entire benefit is assigned directly to the bank, the mortgage is reduced, but the family does not immediately receive money for living costs, taxes or maintenance. If only the family is named as beneficiary, there is no guarantee that the funds will actually be used to reduce the mortgage.
Comparison of insurance types
| Solution | Typical benefit | Advantage | Disadvantage |
|---|---|---|---|
| Term life insurance | One-off lump sum following death. | Clear and often comparatively inexpensive family protection. | No benefit for illness or disability without additional cover. |
| Decreasing term life insurance | A death benefit that decreases over time. | May follow the decreasing mortgage and reduce premiums. | May provide insufficient protection if amortisation is slower or the mortgage increases. |
| Disability pension | Ongoing pension following insured disability. | Helps with a long-term loss of income. | Health assessment, waiting period and potentially complex claim assessment. |
| Payment protection | Time-limited payment of agreed instalments. | May bridge short-term financial difficulties. | Limited duration, maximum amounts and numerous possible exclusions. |
| Critical illness insurance | Lump sum following a precisely defined diagnosis. | Freely usable capital following certain illnesses. | Not every serious illness meets the contractual definition. |
| Endowment life insurance | Death cover and a savings benefit. | Combines pension provision, saving and possible indirect amortisation. | More complex, long-term and potentially expensive if terminated early. |
How high should the insurance cover be?
The insured amount does not necessarily have to equal the entire mortgage. The decisive question is how much money would be required for the remaining household members to keep the property over the long term.
Step 1: Calculate the financing following the event
Examine how the situation would change following the death or disability of each person:
- Which income would be lost?
- Which state pension, disability, pension fund or insurance benefits would arise?
- How high would mortgage interest and amortisation remain?
- Which childcare or care costs would be added?
- How high would maintenance, taxes and service charges remain?
- What mortgage amount would be affordable using the remaining income?
Step 2: Deduct existing benefits
Consider existing protection:
- death benefits from the pension fund,
- widow’s, widower’s or orphan’s pensions,
- disability benefits,
- accident insurance benefits,
- existing life insurance policies,
- liquid reserves and securities,
- other properties or realisable assets.
Step 3: Determine the protection gap
Simplified calculation
Outstanding mortgage: CHF [amount]
Mortgage affordable after the event: CHF [amount]
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Required mortgage reduction: CHF [amount]
Additional capital requirement:
Living and childcare costs: CHF [amount]
One-off costs and reserve: CHF [amount]
Existing insurance benefits: – CHF [amount]
Available unrestricted assets: – CHF [amount]
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Estimated additional protection gap: CHF [amount]The calculation should be completed separately for each person. Different insured amounts may be suitable for a couple where income, childcare responsibilities and pension benefits are distributed differently.
These policy conditions should be checked
| Policy provision | Important question |
|---|---|
| Insured event | Which specific causes trigger a benefit? |
| Insured amount | Does the amount remain constant or decrease over time? |
| Waiting period | How long must the household cover the costs themselves? |
| Benefit duration | Is the benefit paid once, for a few months or until a certain age? |
| Exclusions | Which illnesses, activities or situations are not insured? |
| Definition of disability | Is the previous occupation or the wider labour market assessed? |
| Beneficiary | Does the bank, family or another person receive the benefit? |
| Assignment or pledge | Which rights does the bank receive and which changes require its consent? |
| Premium development | Does the premium remain constant or increase with age? |
| Cancellation | When can the policy be changed or terminated and which costs arise? |
| Sale of the property | Can the policy be continued or used for a new mortgage? |
| Tax and pension restrictions | Is the policy unrestricted or tied within pillar 3a? |
Answer health questions carefully
Read every question carefully and provide all requested information. Retain the application and all answers. Ask for written clarification before signing if a question is unclear.
Beneficiary designation, assignment and pledge
With a pledge, the policy serves as security for the bank. With an assignment, rights under the policy may be transferred to the bank. This can facilitate financing, but it reduces the insured person’s flexibility.
Review the policy regularly
A review is particularly useful following:
- the purchase or sale of a property,
- an increase or substantial amortisation of the mortgage,
- marriage, separation or divorce,
- the birth of a child,
- part-time work, a change of employment or self-employment,
- a substantial increase or decrease in income,
- retirement or early retirement,
- a change of beneficiary.
What should be done when making a claim?
- Notify the insurer of the event as quickly as possible.
- Keep the policy and insurance conditions available.
- Submit the required medical, employer or authority documents.
- Clarify the waiting period and expected start of benefits.
- Inform the bank early about possible payment difficulties.
- Plan a temporary solution for mortgage interest and ongoing costs.
- Check the beneficiary designation, assignment and payment account.
- Request the decision and benefit calculation in writing.
The insurer and bank are separate contracting parties
Reporting an insurance claim does not automatically suspend the payment obligations under the mortgage. Until the benefit is actually paid, the contractual amounts must generally continue to be paid or a new arrangement must be agreed with the bank.
Which alternatives are available?
Not every household requires separate mortgage insurance. Depending on the situation, other measures may be more suitable or less expensive.
| Alternative | Advantage | Limitation |
|---|---|---|
| More equity | Lower mortgage and lower ongoing financial burden. | Ties up additional assets in the property. |
| Faster amortisation | Reduces the outstanding debt and dependence on interest rates. | Reduces available liquidity. |
| Larger emergency reserve | Can be used flexibly for different financial events. | May not fully cover a long-term loss of income. |
| Existing term life insurance | May protect the family independently of the specific mortgage. | The insured amount must match the current protection gap. |
| Disability pension | Covers not only the mortgage but also other living costs. | May be expensive because of the health assessment and long benefit period. |
| More conservative purchase price | Improves affordability and reduces dependence on insurance. | Restricts the choice of properties. |
| Two mortgage tranches with different terms | May spread renewal and interest-rate risks. | Does not directly protect against death or disability. |
A combination is often appropriate: sufficient reserves for short-term interruptions, term life insurance for the family and targeted disability protection for long-term income risks.
When is mortgage insurance useful?
More likely to be useful
- Affordability depends heavily on one principal income.
- Children or other family members are financially dependent.
- Available reserves are limited.
- The mortgage is high in relation to income.
- Existing pension benefits show a clear protection gap.
- The family intends to retain the property over the long term.
Less likely to be necessary
- The mortgage is already low.
- Either income could independently support the financing.
- Substantial liquid reserves are available.
- The pension fund and existing policies already provide sufficient protection.
- The property could be sold without financial pressure.
- An additional policy would mainly create duplicate cover.
Practical examples
Example 1: Family with one principal income
A couple finances a house mainly using one person’s income. If that person died, the remaining income would not support the mortgage. Term life insurance reduces the mortgage sufficiently for the surviving person to remain in the home with the available survivor benefits.
Example 2: Two similar incomes
Both partners earn similar amounts and have good pension fund benefits. Insuring the full mortgage may be excessive. A smaller death benefit aligned with the remaining income may be more appropriate.
Example 3: Self-employed person
A self-employed homeowner has no employer-funded daily sickness allowance and only limited disability benefits. Individually structured disability insurance may be more important than standard unemployment payment protection that may not insure self-employed people at all.
Example 4: Policy with a decreasing insured amount
The death benefit decreases each year in line with the planned amortisation schedule. The mortgage is later increased to finance a renovation. Unless the policy is adjusted, a larger difference develops between the insured amount and outstanding mortgage.
Step by step to suitable protection
- Record the outstanding mortgage, amortisation and ongoing housing costs.
- Calculate the financing following the death, illness or disability of each person separately.
- Identify benefits from state pension insurance, disability insurance, the pension fund, accident insurance and existing policies.
- Include liquid reserves and unrestricted assets.
- Determine the genuine protection gap.
- Compare lump-sum benefits, pensions and payment protection as different solutions.
- Obtain several offers with the same insured amount and benefit duration.
- Check waiting periods, exclusions and medical restrictions in writing.
- Coordinate the beneficiary designation, assignment or pledge with the bank.
- Calculate the total cost over the planned policy term.
- Only sign after the policy has been checked completely.
- Update the insurance following important changes in life or financing.
Checklist: Reviewing mortgage insurance
Financial position
Existing insurance protection
Insurance offer
Beneficiaries and flexibility
Frequently asked questions about mortgage insurance
Summary
Mortgage insurance can protect a family and property financing in the event of death, disability, serious illness or an expressly insured loss of income. Its greatest advantage is that a sufficiently high benefit can reduce the mortgage or temporarily secure ongoing payments. Disadvantages include additional premiums, health assessments, waiting periods, exclusions and possible long-term contractual commitments. Because the term mortgage insurance covers different products, the genuine protection gap, existing pension benefits and financial reserves should be assessed first. The insurance does not replace equity, affordability, amortisation or conservative financial planning.