'Must Knows' about Mortgage Insurance (and what traps to avoid!)

When purchasing a mortgage in Israel, banks require the mortgage holders to purchase a life policy for the sum of the mortgage, and a basic property insurance policy based on the reinstatement value as it appears in the appraisal report. The reinstatement value is the amount required to cover the cost of rebuilding the asset.

It is widely known fact that banks in Israel are an association of monopolies (oligopoly), and they use their power and pressure customers into purchasing the property and life policies through them.

Do NOT agree to buy the policies via the bank!

In 2005 the regulator determined that a bank insurance agency cannot sell property insurance with third party liability coverage (a coverage that exists in every policy on the market).

I once innocently thought that this decision was intended to increase competition and weaken the monopolistic power of the banks. Now I understand the banks simply wanted to lower their costs, and found a way to whitewash their desires.

Third-party coverage is a crucial insurance coverage that protects you from water floods and fires that may harm the neighboring properties. It protects you if a visitor such as a cleaning lady are hurt on your property or in your home. In short – it's a very important insurance.

Regarding life insurance – it's important to note that the vast majority of insurances are structured to increase the premium annually. Keep your finger on the pulse and regularly ask for a discount to maintain a lower premium. There is a company on the market offering a fixed premium for 15 years, but that means paying double of what the market offers.

More Things You Should Know

From my experience over the years I've discovered that sometimes banks approve that only some of the mortgage takers should be required to take out a life insurance policy, due to the poor health of one of the mortgage takers, which prevents them from getting life insurance.

The law in Israel requires insurance companies to approve life insurance for mortgage takers, but they can charge outrageous premiums, which absolves this as a solution.

There is a company that is part of a leading insurance firms, specializing in insurance for individuals with a problematic medical state (also health insurances).

When I was an intern, I came across a case in which the client stated that the Bank of Israel declared that if the value of the land exceeds the sum of the mortgage, the requirement for insurances is waived and there is no obligation to purchase them. I tend to believe this, although I haven't been able to find information about it.

Bottom line – when taking out a mortgage, I suggest purchasing life and property insurance only through an insurance agent for the following reasons:

Life insurance will be cheaper than the bank insurance agency which acts as a monopoly.

Property insurance will be more comprehensive and include third-party coverage. Additionally, you'll be able to purchase important extensions such as earthquake insurance, contents insurance, terrorism insurance and an insurance that considers the true value of the property based on market value, and not just the reinstatement value (which includes land value).

So please, before going to your meeting, make sure you're equipped with the relevant insurances, and don't cave under the pressure of the bank's aggressive sales personnel.