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When applying for a mortgage loan, the bank usually asks the customer to take out a life insurance policy, among other reasons, to ensure that the holder can repay the debt in the event of a serious incident or that, in the event of death, the heirs do not have to face any financial claims arising from the mortgage.
Still, is it compulsory? The Bank of Spain sheds light on this with a big, fat 'NO'. The only compulsory insurance linked to a mortgage loan is home insurance, as legislation requires coverage against fire damage. However, Spain's central bank points out that most banks and other lenders make taking out life insurance a requirement for granting a mortgage with them. Here comes the second point of clarification: this insurance does not necessarily have to be taken out with the bank, but can be taken out with an insurance company chosen by the client.
In any case, the Bank of Spain recommends taking into account certain aspects before selecting the most suitable life insurance policy. For example:
- Know whether the mode of payment will be a single premium or a periodic (usually annual) payment.
- Know the real cost of the insurance. The pre-contractual information should include the cost of each insurance policy and the difference between taking out the mortgage loan with and without taking the lender's insurance that might come with bonuses. In this regard, the Bank of Spain states that, in order to compare the cost of different insurance policies, it should be borne in mind that if the lender offers bonuses for taking out the insurance, the real cost will be the cost of the premium minus the bonuses. Otherwise, if the insurance is taken out with a different company, there will be no option of benefiting from the aforementioned bonus.
It is important to compare independently the bank's offers with those of different insurance providers, to study the cover and analyse whether it suits our needs and adapts to our personal circumstances. As the Bank of Spain mentions, "an insurance policy with insufficient cover is of no use to us, and one with excessive cover will mean paying a higher premium."
Even if the life insurance policy is signed, the customer has the right to cancel it within 30 days of taking out the policy (cooling-off period).
As mortgages are for the long term, the insurance market may change over that time and new products may come to market that are more attractive both in terms of price and cover. The holder of the mortgage loan can change life insurance whenever s/he wants. The only drawback may be in the first years because sometimes the bank or insurance company requires a minimum loyalty period.
Likewise, when the change takes place, part of the debt will have been repaid, so the effect of any bonus or discount will be less and, perhaps for this reason, the bank's insurance product will lose its attractiveness. The Bank of Spain advises that, if you decide to change insurance company, you should first check with the bank what the necessary procedures, deadlines and requirements of the new insurance are in order to be able to make the change effective with no interruption to protective cover.
The Bank of Spain also considers other scenarios. It may happen that a combined product is cancelled for reasons beyond the borrower's control. To avoid the loss of the bonus enjoyed by the customer, the financial institution must offer a bonus product similar to the cancelled one.
Similarly, if the loan is repaid early, the holder is entitled to have the associated insurance policies cancelled and to obtain the return of unearned premiums.
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