Home life insurance: which coverage to choose

If you are buying a house with a bank loan, you already know that you need to get life insurance. But when you look at the paperwork, the sheer volume of acronyms and coverage options can feel completely overwhelming. What is the difference between IAD and ITP? How much capital should I insure?

Choosing the wrong coverage can leave your family financially stranded if a tragedy occurs. To help you navigate this complex financial product and choose the protection solution best suited to your family’s actual needs, the Folime financial team has created this definitive mini-guide with the answers to the most frequently asked questions.

Is Life Insurance Associated with a Home Loan Mandatory by Law?

No. Strictly speaking, the Portuguese state does not legally require you to have life insurance to buy a house. However, banks do. No bank will grant you a mortgage loan without it. It is their way to absolutely guarantee the repayment of the residual capital in the event of your death or severe disability.

How Does «Insured Capital» Work?

In life insurance policies linked to housing credit, the «Insured Capital» corresponds to the amount of money you owe the bank.

However, there is a catch that most homeowners don’t know: In most basic contracts, the amount of the initially contracted insured capital is not automatically updated throughout the duration of the contract. As you pay your mortgage every month, your debt to the bank decreases, but your insured capital remains the same.

• The Advantage: If you pass away when you owe the bank €150,000, but your insured capital is still fixed at €200,000, the insurer pays €150,000 to the bank to clear the house, and gives the remaining €50,000 in cash directly to your family!
• The Disadvantage: Keeping the capital artificially high implies you are paying a much higher monthly premium than necessary. (Folime Tip: You can request an insurance policy with «automatic updating» of the insured capital, which will lower your monthly premium as your bank debt decreases).

What Are the Options for Joint Mortgages (Two People)?

If you are buying a house with a partner, there are two options available regarding the contracted capital guarantee: 100% or 50%.

• The 100% Option: If one of the insured persons passes away, the insurance pays 100% of the remaining debt. The surviving partner is left with a fully paid-off house. We always highly recommend this option.
• The 50% Option: If one person passes away, the insurance only pays half the debt. The surviving partner is still responsible for paying the remaining 50% of the mortgage alone, which can be financially devastating on a single income.

What Are the Main Coverages? (IAD vs. ITP/IDPAC)

When you look at your contract, you will see one primary coverage (Death) and you must choose an additional disability coverage. This is the most critical choice you will make.

What is Absolute and Definitive Disability (IAD)?

This is the most basic disability coverage required by banks, and it is the cheapest. However, it is incredibly restrictive. It only pays out if the insured meets three conditions simultaneously:

1. Total and definitive inability to carry out any paid work.
2. A degree of clinical disability equal to or greater than 85%.
3. Permanent dependence on a third person to carry out basic daily activities (eating, dressing, washing, and moving).
   In short: This coverage only protects you if you are essentially bedridden or in a vegetative state.

What is Permanent Disability for Compatible Profession (ITP / IDPAC)?

This is the more comprehensive—and highly recommended—disability coverage. While slightly more expensive, it offers true protection. It pays out if:

1. You have a total inability to carry out your specific paid work, or any other activity compatible with your knowledge and skills.
2. Your degree of clinical disability hits 60% or 65% (depending on the specific policy).
   In short: If you get severe cancer or suffer an accident that prevents you from working your job, but you can still feed and dress yourself independently, this coverage will activate and pay off your house.

Is It Possible to Choose Even More Coverage?

Yes. If the bank only requires basic IAD coverage, you always have the right to opt for broader protection (ITP/IDPAC).

Furthermore, you can often purchase a Serious Illness rider. This specific add-on guarantees the payment of the contracted capital if the insured person is diagnosed with a life-threatening illness (such as a stroke, cancer, Alzheimer’s, Parkinson’s, or myocardial infarction), allowing you to focus on your health rather than your mortgage payments.

Can I Transfer My Mortgage Insurance to Another Company?

Absolutely. You do not have to stay with the insurance company the bank forced upon you when you signed the deed.
You have the legal right to transfer the life insurance associated with your home loan to any external insurer at any time, provided the new policy meets the bank’s minimum coverage requirements. In fact, transferring your policy to an independent insurer is one of the easiest ways to save thousands of euros over the life of your loan!

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 an insurance policy before signing.