Have you heard of mortgage life insurance? Within life insurance there is a key policy, linked to the mortgage.
For most banks, having this “protection” is a fundamental requirement when signing any mortgage. But what many people do not know is that we do not have to accept the product offered to us by the bank.
In this article we are going to take a closer look at mortgage life insurance: from what it covers to what it does not cover. type of life insurance including how much it costs, whether it is compulsory and the possibilities you have to compare options in different companies.
What is mortgage-linked life insurance?
A life insurance linked to the mortgage is a type of policy that we take out to protect the payment of a mortgage in the event of the death of the holder.
This guarantees that the mortgage debt will be covered in full (or a significant amount) in the event of an unexpected event, relieving the family of the financial burden it could entail. Typically, policies of this type are designed to decrease in value over time as the mortgage debt also decreases.
Although these insurances are usually compulsory when applying for a mortgage, there are cases in which you can choose to take it out on a voluntary basis. There are also different types of mortgage-linked policies, and it is important to understand the cover they offer and the conditions attached to them before taking out a policy.
What does mortgage life insurance cover? Types of coverage
Life insurance linked to a mortgage loan protects the mortgage holder's family and loved ones against the debt that would be generated if the mortgage holder dies. In addition, optionally, it can also cover permanent disability.
These are the main life insurance coverages:
- Death (Main coverage).
- Absolute and permanent disability. It is optional and is sometimes contracted.
- Occupational and permanent invalidity. It is optional and, although it is very necessary, it is hardly ever taken out by banks.
- Additional capital for death or disability caused by an accident (Optional).
The issue is that, in many cases, the only one protected is the bank through this policy, as it is usually only the death cover that is taken out to pay off the loan, with no additional capital left for family members.
Why take out life insurance with your mortgage?
What could happen if the person who has signed the mortgage dies? As we have already mentioned, mortgage life insurance was created to avoid leaving a partner or the whole family unprotected against this type of debt.
If the person who has signed the mortgage dies, the mortgage life insurance will be triggered and will pay the insured amount to the beneficiaries named in the policy. This amount will be used to cover the outstanding mortgage debt, thus preventing it from falling on someone other than the deceased.
In addition to death cover, some mortgage life insurance policies also provide cover for invalidity. Thus, if the holder becomes permanently incapacitated due to illness or accident, the policy may pay out a pre-set amount that will help cover the mortgage payments.
It is important to note that the details and specific coverage may vary depending on the insurance company and the policy taken out. If you want to ensure adequate protection, you will need to read the terms and conditions carefully before signing a mortgage life insurance contract.
When can I take out mortgage life insurance?
The contracting of such insurance can take place at different times, depending on the circumstances of each client.
Generally, It is recommended that it be taken out at the same time as the mortgage is signed, to protect the family if the holder dies unexpectedly.
However, some financial institutions allow it to be taken out at any time during the life of the loan. It is even possible to do so retrospectively, if the mortgage holder decides to purchase life insurance afterwards to cover his or her debt.
Is it compulsory to take out life insurance on a mortgage?
It is not compulsory, but many banks require their customers to have a life insurance policy in order to receive a mortgage loan.
According to mortgage law (Law 5/2019 of 15 March 2019, regulating real estate credit agreements.), your bank can require you to take out the policy, but it cannot force you to take out its policy.
In other words, The law protects you so that you can compare different mortgage life insurances and choose the one that offers you the best conditions..
In this sense, PIB Group Iberia helps our clients to choose the best solution for their needs. best choice in mortgage life insurance. And, in fact, most of the time it does not coincide with the one offered by your bank.
In any case, taking out a mortgage without life insurance is not usual, since it guarantees the family's financial stability. Moreover, having a life insurance policy can also be beneficial for the holder of the loan, as it can include additional coverage, such as compensation for serious illnesses, the preparation of an online will or a second medical opinion, among others.
On the other hand, one thing that the legislation does provide for is that, when taking out a mortgage, as a minimum, you must have insurance to cover damage caused by fire.. In practice, the household insurance and life insurance are often taken out together to complement this minimum fire protection.
What happens when there are two incumbents?
There are two options when it comes to taking out a life insurance policy of this type: to take out 100% of the capital loaned to the same holder or, if there are two people receiving the mortgage loan, 50% for each of them. Everything will depend on the bank and the people who take out the loan.
Of course, if the insured person so wishes, this insurance can be extended in the contractable sum insured. For example, if your personal situation requires more capital or if you want to take out additional cover.
Mortgage life insurance premiums
Premiums are the payments you make to the insurer in exchange for the coverage it offers you. Premiums can be paid in different ways: monthly, quarterly, half-yearly or annually.
They come in various types:
- Level premium: The premium amount remains constant for the duration of the policy. It is a good option, but is usually more expensive in the short term.
- Natural or Risk Premium: The premium increases with the age of the insured. It is cheaper initially, but can become expensive over time. It is the most common option.
- Single premium: A lump sum is paid at the beginning of the contract. This option is less common, and is often quite disadvantageous for the contracting party.
Calculate the price of life insurance with a mortgage, how much does it cost?
To calculate the price of life insurance for mortgages it is necessary to take into account 3 main factors before taking out a mortgage:
- Age of the persons who take out the insurance and who have taken out the mortgage. The price changes substantially if customers are in their thirties or over 50 years old.
- Coverage. Whether they only protect against death or whether they offer a more comprehensive option that also includes permanent disability.
- Subscribing entity. As we told you in a previous article, life insurance can be a 30% more expensive at the bank than at an insurer.
Mortgage life insurance taxes and surcharges
When we talk about mortgage life insurance, we often focus on premiums and coverages, but there is one aspect that often goes unnoticed: taxes and surcharges. These elements increase the total cost of your policy and affect your long-term budget. They are, for example:
- Insurance Premium Tax (IPS). In Spain it is 6% and is applied on the net premium.
- Compensation Surcharge. It is intended for Insurance Compensation Consortium and is compulsory. The rate varies according to the type of insurance, but for life insurance it is usually 0.15% on the net premium.
- Insurance surcharges. Some companies apply additional surcharges for handling, administration or even payment in instalments.
Mortgage life insurance: price is not everything
In addition to these factors, when calculating the premium, the following must also be taken into account take into account other aspects, such as the sum insured, the duration of the insurance, the interest rate in case of instalment payments and possible pre-existing conditions. These points can directly affect the cost of mortgage life insurance.
It is important to know the best life insurances and request quotes so that you can choose the alternative that best suits your needs and requirements.
Is it better to take it out with your bank or with the insurer of your choice?
In the INESE's latest comparative study of risk life insurance premiums, In 2022, the data show significant differences between insurance companies and banks.
According to this analysis, the average premium is 446.86 euros for bank insurers and 249.26 euros for insurance companies. In other words, taking out insurance with your bank can cost you up to 79% more.
Similarly, in the last year of the analysis, insurance companies lowered their prices (by 2.5 %), while banking-insurance operators raised their prices (7.6%).
How to compare insurers for mortgage life insurance?
As you can see, mortgage life insurance is a choice that can end up affecting your pocket year after year. So that you don't overpay and you can take out the policy that best suits your needs, it is necessary to to compare several insurers to see if the offer is better than the one your bank is offering you.
In this sense, so as not to have to look at the companies one by one, the best option is to turn to a brokerage, a “flesh and blood” insurance comparator, which will allow you to consult all the details with a professional, who has the independence to be able to recommend the most advantageous policy from among more than twenty companies.
Your mortgage obligations
When you are comparing mortgages, one thing to look at, beyond the interest rate, is what the banks require of you to sign with them.
It is important that, in the negotiating your mortgagea, try to get them to put the weakest possible linkages.
There are banks that ask you for up to 5 or 6 linked products: salaries, direct debit of bills, contributions to investment funds or pension plans, medical or car insurance, life insurance, home insurance... All this in order to lower the interest rate, but entailing enormous additional costs for the family.
On the other hand, there are banking options that are now requiring fewer linked products, thus favouring the consumer's freedom to take out what they want and need. In this way, you can choose the life insurance that suits you best, without thinking about the detriment it has on your mortgage interest rate.
How to claim mortgage life insurance?
Claiming mortgage life insurance is a relatively straightforward process, but it is important to follow a few steps to ensure you get the right compensation.
- Firstly, it is essential to notify the insurer of the mortgage holder's death as soon as possible. Normally, you will need to provide a copy of the death certificate and any other documentation required by your insurance company.
- Next, you will need to fill in a claim form making clear the details of the mortgage loan and the designated beneficiaries. If needed, you can ask for a copy of the mortgage contract and any other relevant information.
- Later, the insurer will assess your claim and make a decision on compensation.
- If everything is in order and the requirements of the contract are fulfilled, the company will shall pay compensation to the designated beneficiaries. If you have any questions about the claims process, your insurance broker can offer you personalised advice.
Can I cancel my mortgage life insurance with my bank?
Insurance policies are renewed every year, so before this renewal you can cancel or return yours to the bank and take out one with the insurance company of your choice. However, you will have to give your bank one month's notice.
In fact, a common practice is to subscribe to the first year with the bank, but then switch to a brokerage as PIB Group Iberia. Even so, you can choose from the outset to decline your bank's offer, something that not many people are aware of at the time of signing the mortgage.
If you are looking for help and advice on taking out this type of policy, please do not hesitate to contact PIB Group Iberia. We have many years of experience and look forward to helping you.
