IS LIFE INSURANCE COMPULSORY WITH A MORTGAGE? We tell you whether life insurance is compulsory with a mortgage.
By law, you don't have to take out life insurance to be granted a mortgage, although in practice banks require it for approval.
A mortgage is often the only option for people who want to buy a home. New owners may have many questions before signing one with the bank. One of the most common is whether life insurance must be taken out with the mortgage, a question that often causes consumers confusion and misunderstanding. We answer it in this guide.
It's not surprising that people are wary of this banking product, given banks' abusive practices in this area that the law has had to correct. Policies such as home insurance usually come into play when you buy your own home. Life insurance, however, may have a less obvious link to mortgages, and even so many people end up taking out these policies at their bank's suggestion.
It's important to stress that if you're signing a mortgage, the only insurance that can be made compulsory is fire damage cover. Why? Because it covers damage to the property in the event of fire, for an amount equal to the cost of rebuilding the home. In those cases the bank with which the insurance and mortgage were taken out will cover the cost of repairs.
Life insurance when taking out a mortgage may seem essential, as banks very commonly offer this kind of product. But as a consumer it's important to know that nothing can force you to take out life insurance with your bank. As we've seen, current law states that no bank can force its clients to link life insurance or any other policy (that the lender sells) to their mortgage loan.
What's more, ultimately the consumer has the right to take the matter to court if this happens. The problem is that most people aren't aware of it. But the bank can never force the client to take out this product, especially if it presents it as a condition for granting the mortgage. In that case it would be using its position to gain an advantage and sell its products in the way that suits it best.
So it's clear that the client has the right to choose who to take out insurance with and the law backs this up. Linked insurance can't be imposed, either generally or directly, on a mortgage borrower. The only exception is where the mortgage is used in the form of covered bonds, derivatives and the like.
Advantages of taking out Home Insurance with the Mortgage
Once you know the law, when choosing it's best to weigh up other offers and services besides the bank's, using a life insurance comparison site such as Acierto.com.
We should also assess whether the life insurance on offer could be advantageous in each case. In the event of disability or the borrower's death, insurance of this kind would protect their family, guaranteeing future financial stability. And by taking out this life policy linked to the mortgage the loan may be paid off and the borrower may get more favourable terms in the situations mentioned.
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How long is life insurance on a Mortgage compulsory?
Since the mortgage 2019 law, as it isn't compulsory to take out life insurance with the mortgage, there's no period compulsory associated with this type of insurance.
What happens to the Mortgage if you don't have life insurance?
If you don't take out life insurance for your mortgage, if you die or suffer permanent disability, the bank will keep claiming the outstanding debt from you or your heirs.
Which insurance is compulsory with a Mortgage?
The only insurance that can be made compulsory is fire damage cover. Why? Because it covers damage to the property in the event of fire, for an amount equal to the cost of rebuilding the home. In those cases the bank with which the insurance and mortgage were taken out will cover the cost of repairs.
Do you need life insurance to get a good Mortgage?
Although most lenders ask for it, a few offer good terms without it. In many cases, to get a good mortgage it has to be linked to life insurance sold through the bank itself. If you don't (or don't keep the policy for the life of the loan), the lender raises the interest rate, making the monthly repayments more expensive.
But is it possible to get an attractive mortgage without meeting this requirement? Although most banks require you to take out one of their life policies to qualify for a competitive rate, a few offer good terms without it.
Around 70% of Spanish lenders ask you to take out life insurance to get an attractive mortgage. In return, they cut the interest rate by an average of 0.40 percentage points, a discount that disappears if the requirement isn't met.
In practice, this generally means taking out this product to get good terms. In other words, paying an average premium of 200 to 400 euros a year (it may be higher depending on the client's profile) for the whole term of the mortgage, which could rise at each annual renewal. In most cases, getting a good rate also means paying in your salary and taking out home insurance with the lender.
Just over 30% of banks operating in Spain don't discount their mortgages for taking out life insurance, and some of them offer good terms. But do these mortgages work out cheaper than those with life insurance? Naturally, the applicant needs to do the sums. They also shouldn't be won over by a low rate, as a mortgage with a slightly higher rate and no insurance may work out cheaper than one with a lower rate discounted for taking out this product.
The opposite may also happen: a mortgage with linked life insurance may be cheaper than one without. That's why it's important to approach both banks that discount the rate for meeting this requirement and those that don't. That way the applicant can compare the cost of the different options and see which works out best.
It's also worth considering how useful life insurance linked to the mortgage could be. If you want to protect your heirs (the debt would be paid off if the borrower died), taking out this policy could be worthwhile. In that case, you'd need to weigh up whether it's better to take out the insurance with the bank (and get a discount on the interest rate) or to take it out independently and be free to switch insurer if the premium rises at the annual renewal.
For more information call 695033558 or take a look at our page on Mortgages.
Juan Rosado
CEO
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