If you are currently paying off a mortgage loan, you almost certainly have a life insurance policy tied to that exact same bank. When you first bought your home, the bank required you to take out life insurance. The idea behind it is simple and highly prudent.
The existence of this insurance does not only protect the bank’s investment. It is a vital guarantee to you, the homeowner, that the loan will be fully repaid in the event of death or severe disability, ensuring your family will never lose their home or inherit a massive debt.
However, many homeowners fall into the trap of thinking they are stuck with the bank’s specific insurance policy forever. If you want to lower your monthly bills or significantly improve your coverage, you should know that it is entirely possible and legal to change your life insurance at any point during the loan period.
Here are the two best reasons to do it: massive potential savings and protection that is actually suited to your life. Here is the Folime team’s guide to transferring your mortgage life insurance.
The Law is on Your Side: Freedom of Choice
In the exciting (and stressful) process of negotiating a mortgage, it is standard practice for the bank to offer you their own in-house life insurance. While having life insurance is mandatory to secure the loan, using their specific insurance is not.
Portuguese legislation explicitly states that the bank must inform the customer that they have total freedom of choice. You can choose to take out insurance with any external insurer you wish, provided the new policy meets the bank’s minimum legal requirements for capital coverage.
6 Things to Consider Before Changing Your Insurance
Just as you have the freedom to choose your insurance on the day you sign the deed, you have the right to switch providers five, ten, or twenty years into your contract. But before you switch, you need to analyze the math.
1. The Spread vs. The Premium (Do the Math!)
Some banks offer a «bonus spread» (a slightly lower interest rate on your mortgage) as a reward for taking out their in-house insurance. If you cancel their insurance, they may raise your spread slightly. However, you must do the math! Bank insurances are notoriously expensive. Very often, the slight increase in your monthly mortgage payment is entirely wiped out by the massive savings you get from a vastly cheaper, external insurance premium.
2. Compare the Disability Coverages (IAD vs. ITP)
Do not just look at the price; look at the level of protection.
- IAD (Absolute and Permanent Disability): This basic coverage only protects you if you suffer a degree of disability greater than or equal to 85%. This means you are completely unable to work and require a third party to feed and dress you.
- ITP/IDPAC (Total and Permanent Disability): This is much more comprehensive. It triggers at a disability level of 60% or 65%. If an illness or accident simply stops you from continuing your specific profession (even if you can still live independently), the insurance will pay off the house. Always aim to upgrade to ITP!
3. The Evolution of the Premium Over Time
The amount you pay for life insurance naturally increases as you age. Therefore, when comparing quotes from new insurers, do not just look at the price for the first year. Ask the broker to show you the projected evolution of the premium over the next 10 years to ensure the policy remains competitive as you get older.
4. Watch for Rate Updating Clauses
Check the fine print. See whether the insurance companies you are considering reserve the contractual right to arbitrarily update their base rates on the renewal date. You want a policy with predictable, transparent pricing.
5. Analyze the Exclusions
Insurance must be adapted to your lifestyle. Pre-existing diseases are usually excluded. However, if your hobbies include participating in amateur speed races, skydiving, or extreme sports, you must ensure these activities are not hidden in the policy’s list of excluded risks.
6. Understand the Insured Capital Updates
When you take out life insurance linked to a mortgage, the insured capital must match the amount you owe the bank. As you pay your mortgage every month, your debt decreases.
Your new insurance policy can be set up to update this capital automatically to match the exact debt, which lowers your premium over time. Alternatively, you can keep the insured capital fixed at the original loan amount. In that scenario, if you pass away when you only owe €50,000 but the policy is for €200,000, the insurer pays the bank €50,000 and gives the remaining €150,000 in cash directly to your heirs.
Step-by-Step: How to Transfer Your Life Insurance
Changing your home loan life insurance doesn’t have to be complicated. Once you have found a better policy with an external insurer, follow these simple steps:
- Sign the New Policy First: Ensure your new life insurance contract is officially approved and active.
- Cancel the Old Policy: You must formally cancel the insurance you signed with the bank via a registered letter sent to the insurance company. By law, you must do this at least 30 days in advance of the policy’s annual renewal date.
- Inform the Bank: You must inform your bank of the change by delivering a copy of the cancellation letter and providing them with the official Apólice (policy document) of your new contract, proving the house is still protected.
- Stop the Payments: Finally, do not forget to cancel the direct debit authorization (Débito Direto) for your old insurance at the ATM or via your home banking app!
💡 A Financial Tip from the Folime Team:
You do not have to navigate this bureaucracy alone. If you want to switch your mortgage insurance, contact an independent insurance broker. They will not only run free simulations across multiple companies to find you the best rate, but they will also handle all the cancellation letters and bank communications on your behalf!
Disclaimer: The information provided in this article by Folime is for educational and financial planning purposes only. It does not constitute formal financial, legal, or insurance advice. Always carefully read the specific terms, conditions, and exclusions (Condições Gerais) of any insurance contract before signing.
