Life insurance when you take out a mortgage

We tell you why it is a good idea to have life insurance when taking out a mortgage
One of the most common requirements for a mortgage loan to be granted is that the borrower also takes out life insurance. Although this is not mandatory, having a life insurance policy is highly recommended since if the mortgage holder dies or becomes permanently disabled and cannot work, the insurance company rather than the heirs or family members will be responsible for paying back the amount still owed on the loan.
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There are life insurance policies associated with repayment of the mortgage. Life insurance is taken out at the same time as the mortgage loan is granted. However, the insurance policy does not have to be taken out with the same bank that grants the loan. There are different types of life insurance, depending on the choices made about how the premiums will be paid:

  • Paying a constant amount: the premium payments remain the same throughout the life of the mortgage, and in the event of the policyholder's death, the insurance will cover the mortgage payments and also pay an additional amount to the beneficiaries designated by the policyholder.
  • Making payments based on the outstanding amount: The amount of the life insurance premiums decreases as the mortgage loan is repaid. The insurance policy is terminated once the final monthly installment on the mortgage has been paid.
  • Paying a single premium: the entire cost of the insurance is paid at the time when it is first contracted. Some banks offer to include financing for paying this premium within the mortgage loan itself.

Mortgage life insurance: protecting your family

When choosing a life insurance policy, bear in mind the following important point: protecting your family from unexpected events, as the property may be a family home.

In this case, it will depend on the beneficiary that you have named, since you can choose from direct relatives, partners, or third parties. If the account holder passes away, the insurance company will pay the outstanding amount on the date of death. If there is no life insurance available, the heirs will have to select one of these three alternatives:

  • Decline the inheritance entirely. In this case, they will not become owners of the mortgaged real estate.
  • Accept the inheritance under benefit of inventory. This option allows the heirs to receive the inherited assets and also use them to cover the debts of the deceased, without having to make use of their own resources.
  • Accept the inheritance and assume the associated mortgage debt.

If there were two mortgage holders, the debt will be divided 50/50 between the remaining holder and the heirs; if the heirs decline the inheritance, the remaining mortgage holder will be responsible for repaying the entire mortgage.

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If the mortgage loan is repaid early

If the customer decides to pay off the mortgage early, this can lead to two situations. First, if the loan holder decides to cancel the insurance, the portion of the premium for the insurance not used will be refunded. Second, the life insurance policy can remain valid, with the person(s) named by the customer becoming the beneficiaries. If this is not done, the heirs will be the beneficiaries.

Is it possible to cancel an insurance policy contracted along with a mortgage?

It is possible to cancel the life insurance if more than one year has passed and if notice is given one month in advance. This can be done just by notifying the insurance company.

Another option is to cancel the life insurance within the first 30 days after its contracting, and as in the case above, this can be done simply by notifying the insurer. However, the insurance company will still charge the proportional amount of the premium for the amount of time the insurance coverage was valid.

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