Is it compulsory to take out life insurance with a mortgage?
Taking out a mortgage is a very important step. It is a loan of a very large amount and you will have to pay it back for a large part of your life. That's why it's important to know the ins and outs of this type of financing.
Specifically, in this article we will focus on answering a question you may have already asked yourself: is it mandatory to take out life insurance with the mortgage?
Is life insurance compulsory with the mortgage?
Yes, it is possible that an entity may require as a prerequisite for granting your mortgage the fact that you have a life insurance. This means that, if you do not have this type of insurance, the entity may reserve the right not to grant you its financing.
Life insurance on mortgagesHowever, it is important that you bear in mind that the fact of taking out life insurance to obtain the mortgage does not oblige you, in any way, to take out the insurance offered by the entity. Therefore, even if the bank requires you to have life insurance in order to grant you a loan, it cannot force you to take out the insurance that they have chosen.
What often happens is that the entity gives you a policy option and with it comes certain advantages in the payment of interest on the loan. In other words, you will pay less interest if you take out the insurance they want, than if you take out one on your own. If this is your situation, we recommend that you do some calculations to see if you will really be saving at the end of the day.
Is there any insurance that is compulsory when taking out a mortgage?
Although it is not a condition in 100% of the cases, it is generally compulsory to take out a home insurance when you sign a mortgage. And with the law in hand, this is the only compulsory insurance that the entity can demand when granting you a loan. This insurance will cover damage to the property and must be for an amount equivalent to the cost of rebuilding the home.
And just as with life insurance, it is not compulsory to take out the policy offered by the bank. Therefore, although it is compulsory to have this type of insurance, which we commonly know as fire insurance, you can choose the company you want to take it out with.
The advantages of taking out life insurance
Although life insurance, as we have seen, is not compulsory by law to take out a mortgage, it is interesting to take out one for several reasons. Next, we will see which are the reasons why it would be wise to take out life insurance if you have a mortgage, even if the entity does not ask for it.
If you cannot pay
If you are out of work or unable to work due to illness, life insurance may take over the mortgage payment or at least part of it during the time when it is most difficult for you to pay.
Without a doubt, this translates into great peace of mind, since with this coverage you will not have to worry excessively and you will be able to dedicate yourself to what is really important: recovering, in case of illness; or looking for a job if you have become unemployed.
In case of permanent disability
If something happens to you that results in a permanent disability, the life insurance associated with the mortgage may offer you extra advantages. In this case, we are talking about a supplement to the pension that the State would grant you for this disability.
In the event of death
This is the most common reason people decide to take out life insurance when taking out a mortgage. Having an insurance whose coverage includes the payment of the rest of the mortgage in case of death is extremely important.
In this way, you would not leave the burden of the mortgage on your home to your heirs. Also, if you are married and you both hold the mortgage, the life insurance will pay off the part that you have determined to be the responsibility of the deceased spouse, relieving the burden on the other.
Other frequently asked questions about life insurance and mortgages
In addition to the ones we have already answered, there are some frequently asked questions and points that are important for you to consider when taking out your mortgage and related insurance.
Can the insurance be terminated? In what time frame?
Yes, if you take out the life insurance offered by the entity granting the mortgage, you can cancel it once you have been granted the financing. But be careful, it is important that you take into account the consequences that this action may have. If the entity offered you advantages by contracting this insurance, when you cancel it, the interests of the mortgage may increase.
You can cancel the insurance in the first 30 days after its activation. You can also cancel it one or two months before the next annual renewal.
Beware of the single premium
Some banks include life insurance in a single payment within the mortgage. They do this to protect against the client switching life insurance to another company. Be careful with this point because, if that is your case, you will not be able to change your insurance company because you will have already paid for the insurance in full.
If you take out life insurance, make sure you know who the beneficiary is. It is logical that this insurance will only pay the bank the remaining amount of the mortgage in case of death. This way, the person you choose will be the real beneficiary of the insurance and the bank will not keep the rest of the capital, since it does not correspond to them.
In summary, we can say that according to the law, it is not compulsory to buy a life insurance when you take out a mortgage. However, it is possible that your entity demands it as a requirement to grant you a loan. Remember to make the necessary calculations to check if it is more profitable for you to contract the insurance offered by the bank or to look for one yourself. And, as always, remember to read the small print.
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