Life insurance tied to your mortgage and outside alternatives

Key rules

• Not compulsory: A bank cannot force you to take life insurance to get a mortgage.
• Bonus: A bank may offer a lower rate for life insurance, and must explain it in the offer sheet.
• Outside policy: The bank must accept an equivalent policy from another insurer without worsening your terms or charging you.
• Cancelling: Dropping the policy without replacing it can cost you the bonus.

Is life insurance compulsory with a mortgage?

No. A bank cannot make life insurance compulsory to give you a mortgage. It can ask for some other insurance, typically home insurance against damage. For life cover, it can only offer a bonus, which is a lower interest rate if you take the policy.

How the bonus works

The bonus must be spelled out in the bank's offer sheet, the FEIN. It has to be clearly explained, put in numbers and linked to the cost of the product. Banks usually give it as a reduction of the interest margin, often a few tenths of a percentage point. The size varies by bank and mortgage type. It often depends on other products too, such as payroll, home insurance or cards. Compare the FEIN from each bank you talk to.

What an outside policy has to match

You can pick your own insurer. The bank must accept an equivalent policy from another insurer. It cannot worsen your mortgage terms or charge you for doing so.

Equivalent means the cover and guarantees are at least equal to the bank's own policy. In practice that means the same level of cover and the same insured risks. The bank decides whether your policy qualifies. If you disagree, you can complain to the Bank of Spain's complaints service.

What a mortgage life policy looks like

It is normally a term policy for death, and often for permanent disability too. The bank is usually named beneficiary up to the outstanding debt. Anything above that goes to your family. The insured amount usually matches the loan and falls as you repay it. The premium often falls too, or the policy is renewed every year.

Another option is a policy with a fixed amount, with your heirs as beneficiaries. The bank then takes the policy as a guarantee.

Changing policy after you sign

You can cancel or replace the policy at renewal, or change insurer. Your mortgage deed does not usually force you to keep it. If you simply cancel, the bank can usually remove the bonus and apply the higher rate in your contract. If you provide an equivalent policy, the bank should keep the bonus.

To change, give your current insurer written notice, normally at least one month before renewal, and tell the bank. Read the bonus conditions in your mortgage contract first.

Which option to choose

Work out the yearly cost of an outside policy and compare it with the bank's policy plus the bonus you would lose. The decision, checklist and timeline below help you do this.

Choosing between options

Should you take the bank's life policy for the bonus or use an outside policy?

• Take the bank's life policy: The bonus saves you more than the policy costs over the same period, and you are happy with its cover.

• Use an equivalent outside policy: An outside insurer offers cover at least equal to the bank's for a lower price, or you want your family named as beneficiaries. The bank must accept it without worsening your mortgage terms or charging you.

• Take no life policy: You do not want the cover. The bank cannot refuse the mortgage for that, but it may not give you the bonus.

Add up the yearly cost of each policy and subtract the yearly value of the bonus. Choose the cheaper option that gives equal cover.

Timeline and deadlines

• Compare the cost of the new policy with the interest bonus you would lose: before you give notice

• Give written notice to your current insurer that you will not renew or are changing insurer: normally at least 1 month before renewal

• Tell the bank and send it the equivalent new policy so it keeps your bonus: when you give notice to the insurer

Checklist

• Ask the bank to confirm in writing that life insurance is not a condition of your mortgage.

• Find the bonus in the bank's offer sheet (the FEIN) and note how many tenths of a percentage point it takes off your rate.

• Ask which other products, such as payroll, home insurance or cards, the bonus also depends on.

• Get a quote from an outside insurer and compare its yearly cost with the bank's policy and the bonus.

• Read your mortgage contract for the conditions that keep the bonus before you cancel or replace any policy.

• Give your insurer written notice, normally at least 1 month before renewal, and tell the bank.

What to watch out for

• The bank may say your outside policy is not equivalent: The bank decides whether an outside policy matches its own, and it may reject one with lower cover. Cover and insured risks must be at least equal to the bank's policy. Ask the bank in writing for its minimum cover and risks, and match them. If it still refuses, you can complain to the Bank of Spain's complaints service.

• The cover shrinks as the loan shrinks: A mortgage-linked policy usually pays out only up to the remaining debt, mostly to the bank, so your family may get little or nothing extra. If you want a fixed amount for your family, ask about a policy with your heirs as beneficiaries.

• Death and disability risks differ between policies: These policies normally cover death and often permanent disability, but not always. Check which risks each policy covers before you compare prices.

Frequently asked questions

Who gets the money from a mortgage life policy if I die?

The bank is usually named beneficiary, but only up to the outstanding mortgage debt. Any excess goes to your family. The insured amount normally equals the remaining loan, so it falls as you repay.

Can I use a policy with a fixed amount instead of one that shrinks with the loan?

Yes, you can use a policy with a fixed amount and name your heirs as beneficiaries, as long as the bank accepts it as a guarantee. This keeps the full amount for your family rather than letting it fall with the debt.

Does the bank have to tell me in writing how big the bonus is?

Yes, the bonus must be clearly explained in the bank's pre-contract offer sheet (the FEIN) and be measurable in figures. It must also be linked to what the policy costs and benefit you.