Is life insurance mandatory to apply for a mortgage?

Receiving a home with a mortgage can be a potential reason for renouncing the inheritance. Many are unaware of the tools with which they can protect their heirs, including the hiring of mortgage life insurance linked to the loan.

“By contracting life insurance linked to the mortgage, the client establishes insurance in favor of the bank, so that, in the event of death before paying the mortgage, the debt is satisfied,” explains Arantxa Goenaga, lawyer and partner of the legal firm Circulo Legal Barcelona.

This instrument, always optional, was common a few years ago because many banks made the loan conditional on taking out this insurance. But with the entry into force of the 2019 Mortgage Law, it was established that this practice was bank malpractice and clarified that contracting life insurance is voluntary.

Now, “although the bank insists that you contract its conditions, it is not mandatory to access any mortgage product to access the loan,” says Goenaga. Nor can the client be forced to sign any other type of insurance; only that of damages is a sine qua non condition for the mortgage loan.

With life insurance, “the bank protects itself against future defaults and the heirs of the property do not inherit the mortgage,” explains Goenaga. And it is that, she adds, apart from death, these insurances “contemplate possible situations of disability that make the client unable to face the mortgage debt.”

As a general rule, there are two ways to take out life insurance for the mortgage. The first one is to contract it with the mortgage itself, like any other product linked to it. “In exchange, the bank usually offers more attractive interests, which will depend on the number of extras that are contracted with the mortgage,” explains the lawyer. The other option is “to hire it directly with an insurer.”

And which of the options is more convenient? At this point it must be taken into account “that in the final years of amortization, when less interest is paid, life insurance will be more expensive due to the greater possibility of death or disability.” Thus, it is possible that, although discounts are applied, life insurance is cheaper by contracting it with an insurer.