Life insurance linked to the mortgage loan is something that banks demand from their customers and if we think about it it makes a lot of sense. A mortgage is usually a commitment for several decades and life is full of uncertainty, so in case of death, our debt would be covered. Otherwise, it would become the responsibility of our legal heirs, something that nobody wants.
Does the law require me to take out life insurance with the mortgage?
According to the new real estate credit law, in force since June 16, 2019, the bank cannot force us to take out life insurance with the mortgage and, something you should know is that all banks are obliged to accept life insurance that they do not sell, that is, you are free to decide with which company you contract your life insurance.
If you do not do it with them, it is likely that the price of your mortgage will increase. Financial institutions offer reductions in the interest rate and promotions depending on the additional products you contract with them. Something to keep in mind.
What does the life insurance associated with my mortgage cover?
This type of insurance is very explicit with coverages and what it usually covers is the following:
1- Main coverage
It covers the capital that we have agreed to hire in case of death of the insured. It is important to bear in mind that these insurances can cover all the capital so that in case of death the loan would be 100% covered or only a part, for example, 50%, so the legal heirs would have to face the other half.
2- Additional coverage
There are mortgage life insurances that cover absolute and permanent disability. Temporary disability is not usually covered by this type of policy.
Who do I put as a beneficiary of life insurance?
In the event that it is the bank that performs the life insurance, the beneficiary is the bank.
Therefore, in case of death of the loan holder and that the life insurance covers 100% of the mortgage, the heirs will receive the property without a mortgage.
In the event that we are the ones who carry out life insurance with an insurance company, we have the freedom to choose whether the beneficiary is the bank or the people we determine. In this case and in case of death, our heirs will be able with the money to cancel the mortgage if they decide or not to do so and keep the money.
How much does mortgage life insurance cost?
It will depend on the age of the contracting parties and the amount to be insured.
You should keep in mind that, in general, life insurance marketed by banks is usually between 20% and 40% more expensive than what an insurance company would charge you with the same coverage.
Life insurance can be:
- Annual and are renewed year by year.
- Five-yearly, they are renewed every five years.
Some financial institutions offer customers life insurance for high periods (five / ten and even for the entire life of the loan) financing them, that is, introducing them in the amount of the mortgage.
This option a priori may seem good and is marketed by the bank as “you pay it at once and you forget” but it has two main problems behind, on the one hand we will be paying interest on the cost of life insurance and on the other hand, in case of total early cancellation (sale of the house, change of entity, cancellation with own resources … ) of the mortgage you must fight with the insurance company and / or bank to return the amount not enjoyed by this life insurance.
Is life insurance regularized year by year with the mortgage?
Historically, the life insurance carried out by the bank associated with the mortgage was automatically regularized according to the outstanding capital on the one hand and the age of the contracting parties on the other.
The bank realized that it could improve the profitability of the product if it did not do it in this way and, currently, almost no bank markets it like this.
Therefore, at present it must be the contracting party, if he wishes, who actively each year or at every time he considers it requests the financial institution or insurer to regularize the amount of life insurance to the outstanding capital of the mortgage.
In case of not doing so we will find significant increases in the amount of the insurance since the insured amount remains the same as we contracted the mortgage and is only regularized by our age that, irremediably will be year after year a little higher.