When applying for a mortgage, banks often impose as a condition that you take out an insurance policy. Even though it is not compulsory, it may be worthwhile because banks will usually reduce the interest rate spread.
- First, look at the pre-contractual information sheet (FIPRE by its Spanish abbreviation) which must include, among other things, information on the insurance policies you need to take out in order to be granted the mortgage with the terms and conditions offered.
- Second, the information on insurance policies which have to be arranged so that you can take advantage of the terms and conditions of the mortgage must also be included in the Personalised Information Form sheet(FIPER by its Spanish abbreviation), which will be given to you free of charge at least three working days before you sign the deed of sale.
Relationship between the bank and the insurance company
When the bank and the insurance company belong to the same group, the bank must ensure that you are properly informed about the insurance linked to the mortgage. In particular, according to best banking practices:
The bank must inform you about any unpaid insurance payment as soon as it becomes aware of this and must ensure that you have been notified by the insurance company
When the mortgage has been redeemed, the bank must inform you of any related insurance policy that remains in force.
Find out more about insurance policies linked to mortgages from the Market Conduct and Claims Department Criteria in our 2020 Complaints Report (in Spanish) (124 KB).
Types of insurance commonly linked to mortgages
This type of insurance is compulsory when taking out a mortgage.
- If the property which constitutes the collateral were destroyed, this would be seriously prejudicial to the bank. This type of insurance avoids this situation of risk.
- Generally, banks will require that you insure the property for the amount of its valuation, excluding items which cannot be insured such as land.
- Insurance companies usually market this type of product as annual renewable insurance or as multi-year single-premium insurance.
Mortgage agreements usually include a clause requiring that you have an insurance policy in force, so that if you were to fail to do so, the bank can arrange insurance on your behalf. Should this happen, the bank must inform you in advance of the basic characteristics of the insurance (premiums, risks covered, and sum insured)..
Life insurance offers protection should you fail to pay your mortgage in the event of death or disability.
A life insurance policy can be taken out where the amount of the mortgage is set as the sum insured. The bank is designated the beneficiary of the outstanding amount of the mortgage and the insured that of the remainder.
Life insurance can also be arranged where the outstanding amount of the mortgage (or a percentage of that amount) is established as the sum insured for the duration of the mortgage, with the bank as the irrevocable beneficiary.
According to sound insurance practices, if you decide to cancel a single premium life insurance policy because you have paid off your mortgage early, the insurance company must refund you the proportional amount of the premium relating to the unexpired policy term, unless stipulated otherwise in the contract.
It ensures that the bank is paid while the policy holder is unemployed or suffers a temporary disability.
They are usually marketed separately or as additional coverage under a life insurance policy.
Find out more about insurance linked to mortgages on the website of the (Dirección General de Seguros y Fondos de Pensiones) website.
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