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In order to secure a mortgage, banks often ask their customers to purchase a life-insurance policy. This ensures that, in the case of a serious accident, the borrower will be able to repay the loan or, in the unfortunate event of the borrower’s death, that his heirs are not liable to pay any debts incurred by the mortgage.
Is it mandatory? Bank of Spain clarifies this by saying a big fat “NO”. Home insurance is the only mandatory insurance that comes with a mortgage, because legislation mandates coverage against fire damage. Spain’s Central Bank points out that the majority of banks and lenders require that you have life insurance in order to get a loan. The second clarification is that this insurance doesn’t necessarily have to taken out through the bank. Instead, it can be taken with any insurer chosen by the customer.
Bank of Spain advises that you consider certain factors before choosing the best life insurance policy. You can, for example:
– Determine if the payment method will be an annual payment or a monthly payment.
Know the true cost of insurance. The information provided before the contract should include the price of each insurance and the difference in the mortgage loan cost if the lender offers insurance with or without bonuses. Bank of Spain says that when comparing the costs of insurance policies it is important to remember that if a lender offers bonuses in exchange for the insurance being taken out, then the real cost of each policy will be the premium cost minus any bonuses. If the insurance policy is taken out by a different provider, the bonus will not be available.
Comparing independently the offers of the bank with those from different insurance providers is essential. It’s important to examine the coverage and determine if it fits our requirements and adapts to personal circumstances. According to the Bank of Spain, “an insufficient insurance policy is of no value, and a policy with an excessive amount of cover will cost us more.”
The customer can cancel the policy within 30 days after taking it out (cooling off period).
How long can I keep the same insurance coverage until my mortgage is paid?
Mortgages are long-term, so the insurance market can change and new products that are both more affordable and offer better coverage may be introduced. Mortgage loan holders can switch life insurance at any time. In the beginning, there may be some drawbacks because the bank or insurer might require a minimum time of loyalty.
The bank’s product may also lose its appeal if the bonus or discount is reduced. Bank of Spain recommends that if you want to switch insurance companies, you first need to check with your bank about the procedures, deadlines, and requirements of the insurance. This will ensure you can make the change without interruption of protection.
Bank of Spain takes into account other scenarios. The cancellation of a combined product can be due to circumstances beyond the control of the borrower. The financial institution will have to offer an alternative bonus product that is similar to the cancelled bonus in order to avoid losing the bonus.
Similarly, in the event that the loan was repaid earlier, the borrower is entitled for the insurance policies to be cancelled, and the premiums not earned to be refunded.
