How does life insurance on a home loan work?
Are you about to take out a home loan and have come across the obligation to take out life insurance? Find out how this insurance works.
When carrying out a mortgage loan agreement, banking entities ask you to take out life insurance so that they can move forward. But why? And do you have to take out the insurance with the same credit institution? If you want to change insurers later, can you? We answer these questions in this article .
Why am I asked to have life insurance on a home loan?
In order to conclude a housing credit agreement, banks ask for life insurance for applicants . This is a requirement if you want to go ahead with a bank loan to buy a house.
It’s because? Because in this way , the creditor guarantees the receipt of the loan amount through the life insurance Credit policy carried out. That is, in case of death or disability of the applicant, depending on the coverage chosen, the bank is the mortgage lender in the policy.
Thus, the level of risk that the bank runs when making the loan is lower, so the spread on your home loan will also be lower.
Do I have to take out insurance with the credit institution?
Usually, banks ask you to take out life insurance with the insurer of the same credit institution . This request brings with it a “prize”. That is, if you take out life insurance through the same institution, the bank makes a lower spread for your mortgage loan .
In practice, underwriting insurance through the same entity gives you access to a spread bonus. If you choose to take out the insurance through another entity, you no longer have access to this bonus, which means that the spread will be higher.
But know that you are not required to take out life insurance with the company associated with your bank because the law protects you . You can find insurers that give you a premium that is two to three times lower than what bank insurers often offer. Which, when you do the math, can be cheaper than the spread bonus.
This law makes it impossible for the bank to oblige the contracting of insurance with its insurer .
The same law thus allows you to choose the insurance company you want to work with and also to transfer insurance to other companies later, if you prefer.
Can I transfer insurance to another insurer later?
Yes, you can . As mentioned, according to the same decree-law no. 222, you can transfer your life insurance later to a different insurer.
If you are considering transferring your insurance to another insurance company, you should look at several factors: your insured capital, your life insurance coverage and the proposed monthly installment.
What to consider when transferring insurance?
When the home loan starts, the insured capital is equal to the contract value. As the amount owed decreases, this insured amount follows this reduction. However, as time advances and value decreases, our age also increases. And so, the older the credit proponent is, the greater the risk the insurer has, so the premium may increase with age.
But what cannot happen, and what you should be aware of when transferring your insurance to a new company, is that the capital is aggravated by age, but there is no update of the amount owed at the same time .
Then, you must choose which coverage you want and change, if you wish, the one you already have . As a reminder, you have the following options: coverage for death , coverage for Total and Permanent Disability (ITP) – which covers a disability greater than 60% resulting from illness or accident – and coverage for Absolute and Permanent Disability (IAD) – which covers a disability greater than 80%, resulting from illness or accident (vegetative state).
Then, you must also put on the balance the monthly installment that the insurance company offers you regarding the conditions and comparing with other proposals, to understand if the value makes sense or not. For this, you can ask for help from an insurance intermediary, such as Doutor Finanças, who does not charge for this process.
The relationship between the spread and the institution where it takes out the insurance
If you take out life insurance through the same institution, you already know that you can have a lower spread on your mortgage loan, as a “reward”. If you don’t, they may offer you a higher spread .
This is the downside of the situation, and the reason for choosing the insurance company associated with the bank many times. Because if the spread increases, the monthly installment you will pay for your credit to the bank will also be higher .
If you have already made your home loan with life insurance associated with the same institution a long time ago, it is important that you reread the contract . There are also contracts where the specifications on bonuses are not clarified , which allows you to request the transfer of your life insurance to the bank, without increasing your credit spread . Then there are contracts where there was no bonus when keeping the insurance in the bank , so you can change the institution’s insurance without prejudice. However, the most common and recent are the ones mentioned above: contracts where there is a bonus on the spread if you keep the insurance in the bank and an aggravation if you want to transfer it to another insurer.
If this last case is yours and you want to transfer your life insurance, it is best to consider the two situations , which proposed insurance will bring you the most advantages and, if it is for savings, do the math to understand in which of the situations you will be to pay less for the whole cake, in general.
How to do the math and see if the transfer pays off?
Let’s see an example: Gabriel (fictitious name) paid the bank a mortgage loan installment corresponding to 400 euros . In addition, he paid an installment of 82 euros for life insurance and multi-risk insurance . When requesting an insurance transfer to a new institution, his bank made him an increase in the mortgage loan spread of 0.9% , corresponding to an additional 33 euros per month. However, he managed to get a payment of 34 euros from the new insurance company for the two insurances , saving 48 euros per month.
In other words, Gabriel paid 482 euros in monthly installments for mortgages, life insurance and multi-risk insurance. But with the worsening of the spread and the transfer of the two insurances to a new institution, 467 euros remained, taking into account the 34 euros increase in credit provision and the 48 euros savings in insurance . You now have savings of 15 euros per month and 180 euros per year . Therefore, the transfer of insurance on Gabriel’s home loan compensated for the worsening spread by the bank.
In short: you are asked to take out life insurance when contracting the credit, but you are not obliged to do so with the same banking institution. If you take out the insurance through the bank’s insurer, the spread may be lower, but this does not mean that you cannot change it later. Nor does it mean that even with a higher spread, don’t save.