How to protect your family against mortgage risks

Many people dream of owning their own home and living there with their partner or family. Unfortunately, life sometimes involves unforeseen events that can give rise to financial difficulties that can spoil the enjoyment of owning your own home. Such events include incapacity to work or the death of your spouse or partner.

The decision to take out a mortgage marks a significant step on the road to realizing the dream of owning your own home. But in addition to the obvious financial benefits, large mortgages also entail significant risk should anything happen to you.

If the main breadwinner of a family dies suddenly, there is a risk that the mortgage can no longer be paid. In a worst-case scenario, the home will have to be sold. To prevent this, a life insurance policy can make sense. In an emergency it would allow some or all of the mortgage to be paid off.

This makes clear how important careful financial planning is. In order not to leave your financial future to chance, in the following article you will learn more about different options on how to insure your family against misfortune.

Before deciding whether to take out mortgage insurance, we recommend you do your research, taking into account your individual needs, financial situation and risk tolerance. Carefully weigh up the potential pros and cons.

The disadvantages include additional costs – depending on the size and term of the mortgage. This can increase the overall cost of the mortgage. You should also note that mortgage insurance does not guarantee that the property can remain in your possession under all circumstances.

Nevertheless, the advantages should not be ignored: mortgage insurance acts as an important safety net. It contributes to the financial stability of the home by ensuring that the monthly payments can be made even in the event of unemployment, illness, or the death of the borrower. It can therefore help to protect the quality of life of homeowners in the long term.

The financial consequences depend on the reasons for the person’s incapacity to work or the cause of death. The risk of being unable to work due to illness, or the risk of dying from illness, is much greater than the risk of suffering the same fate due to an accident. But most people are better insured against the financial consequences of an accident, and they can cope reasonably well with their disability thanks to their pension fund benefits.

However, an incapacity to work due to illness is a very different story for most people. Very few people have sufficient insurance coverage if their partner is unable to work or dies due to illness. Many families who have not taken steps in advance can no longer afford their home. In the case of incapacity to work, extra costs may also be incurred for remodeling the house, household support, home care, etc.

A term insurance policy is recommended to ensure financial protection in the case of death of the main breadwinner. This insurance will protect you and your dependents by allowing them to use the capital to repay loans or amortize mortgages.

Another way of insuring your family against risks caused by illness is a disability pension. This protects your income should you become unable to work, for example due to illness or an accident. Unmarried partners should also be clear about the regulations in their pension fund. Many pension funds treat cohabiting partners, i.e., unmarried couples, the same as married couples. However, there are often certain prerequisites that must be fulfilled, the Swiss Old-age and survivor’s insurance and Disability insurance only pay out survivors’ benefits to married couples – the same also applies to accident insurance.

If a married couple divorces, the assets are divided based on the chosen marital property regime.

Most married couples in Switzerland are subject to the ordinary matrimonial property regime – community of acquired property, by which assets and liabilities acquired during the marriage are divided. However, in the case of separation of property, the assets and liabilities are kept separate.

Community of acquired property applies whenever no other marital property regime was agreed per marriage contract. In the event of divorceSeparation or divorce – and your home?, the home is divided between the spouses according to the share of personal property and jointly acquired property. If the arrangement is community of acquired property, both spouses are entitled to the share that they contributed from their personal assets at the time of purchase (or during the term of the mortgage). The assets saved jointly during the marriage (acquired property) are divided. To prevent potential disputes, it is important to be able to prove who invested what in the real estate. In the absence of evidence, the acquired property regime is assumed.

To prevent disputes about ownership structures, unmarried couples should sign a cohabitation agreement. Please note: If one partner buys the property on their own, the other party has no rights to this property. The cohabitation agreement can stipulate what the partner who does not own the property has to pay for use and maintenance of the property.

If, however, the couple acquires residential property jointly, it is necessary to choose between the legal forms of ownership: joint ownership and co-ownership. The advantage of co-ownership is that the share owned by each partner is registered in the land registry.

In addition, common-law partners are allowed to finance their property with money from their pension fund or pillar 3a. This provides you with an additional financing option.

Thanks to the Swiss government’s program to encourage home ownership (EHO), more people can now afford to buy their own home. The EHO offers two options: you can either withdraw your pension savings or pledge them to the bank.

If you decide to pledge them, your pension fund benefits are not affected. The pledged funds serve as security for the mortgage.

If you withdraw your vested benefits, you will receive a smaller pension when you retire. In most cases, the benefits will also be less in the case of death or disability. Your pension fund regulations can provide more details. If possible, you should pay back into your pension fund any money that you have withdrawn early.

In the case of unmarried couples, the situation is more complicated when pension funds are withdrawn early. If the partner who has withdrawn the money dies, and the pension fund does not pay any benefits to survivors, the early withdrawal must be repaid from the estate. To make this possible while also ensuring that the survivors can continue to live in the property, a mutual term insurance policy is recommended.

The decision to take out a mortgage marks a significant step towards owning your own home. In the face of unforeseeable life events such as illness, separation or death, needs-based insurance can provide you with crucial protection. Keep in mind that the question of which insurance is the right one depends on many individual factors. To find the right insurance that will provide you with long-term financial stability, we advise you to speak to your financial advisor.