If you’re buying a house with the help of a home loan, you will need to take out life insurance, which, like the property insurance, is mandatory in order to secure the mortgage you need.
Although this life insurance has specific characteristics due to its purpose, if you think it’s just another cost you’ll have to bear, you couldn’t be more wrong. It’s true that it’s another expense for you, but at the same time, it ensures that in the event of a fatality, the loan will be paid off in full. In other words, it’s a safety net for both you and your family.
Also note that you don’t have to purchase it from the financial institution that grants your mortgage. You can choose the insurance company that offers the best financial conditions, as long as it meets the specific requirements of this insurance.
But let’s break it down.
This life insurance has specific conditions different from a standard life insurance policy
Indeed, because it’s associated with a mortgage, life insurance has:
- An initial coverage amount equal to the loan value.
- The insured amount
- decreases annually based on the outstanding debt.
- guarantees the full repayment of the loan in case of fatality.
- The term of the insurance matches the loan term.
- The beneficiary of the insurance is the financial institution that granted the loan (not your heirs as with a traditional life insurance policy).
Consider life insurance as an inheritance for your family
It’s true that the beneficiary of this insurance is the financial institution that granted the loan, not your heirs. But this guarantees that in the event of a fatality, the financial institution will be reimbursed by the insurance company for the outstanding loan balance. Therefore, we can say that this life insurance frees your heirs from debt and allows them to inherit the property without encumbrances.
The life insurance premium depends on the loan amount, term, and your age
In part B of your FINE (European Information Document), in the section referring to the repayment of your loan, you’ll find the amount of premiums for mandatory insurance if you purchase it through the financial institution granting your loan. And although the total amount is the sum of both insurance premiums, most of it refers to life insurance.
When reviewing the table, you can see that the premium amount changes every year. This is because the premium depends on the insured amount (i.e., the loan value) and your age.
Since the insured amount is the outstanding loan balance, which decreases every year, you would expect the premium to decrease annually as well. But as you can see in the repayment table, this doesn’t happen. The reason is simple: your age increases.
Indeed, insurance companies consider that with age, the likelihood of a fatality increases, so there’s a higher probability that they will have to pay off the mortgage debt to the bank. And of course, the higher the risk, the higher the premium insurance companies charge.
The good news is that you don’t have to get the insurance from the institution that grants the loan
That’s right. Life insurance is mandatory, but in reality, you can take it out with any insurance company you choose; you just need to provide proof to the financial institution that you have an active life insurance policy that meets their requirements.
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