IRS and insurance: what are the tax deductions

Anyone who has ever sat in a bank manager’s office to negotiate a housing spread knows the drill. One of the topics always on the table is the absolute necessity of taking out life insurance to pay off the mortgage in the event of a fatal accident.

Protecting the family home so your children always have a roof over their heads is undeniably a good thing. However, many homeowners fall into a dangerous trap: we are fooled into thinking that this single bank insurance policy is enough to make us sleep soundly.

The hard truth is that the life insurance associated with your real estate credit protects the bank first, and your family second. It simply is not enough to guarantee your family’s future stability. Here is why you need to rethink your coverage, and how to calculate exactly what your family actually needs.

The Reality of Home Mortgage Insurance

You found the house you always wanted, you agreed to the bank’s terms, and to reduce your interest rate (spread), you accepted their in-house life insurance.

While the house is now protected, you must ask yourself a hard question: If the worst happens and the house is paid off, how will my family pay for everything else?

Statistically, half of the population struggles to save more than €100 a month after expenses. In a two-income household, if one of the parents suddenly passes away or becomes severely disabled, the immediate decline in monthly income will blow a massive hole in the family finances.

Even if the mortgage payment vanishes, the daily realities of life do not. The grocery bills, the electricity, the car payments, and the rising costs of university tuition still need to be paid. The bank’s insurance will not cover a single cent of these daily expenses.

The Solution: A Secondary «Family Protection» Policy

If you are part of a young couple unable to accumulate a massive sum of savings in a short period, the most effective way to instantly create a financial safety net is through a secondary, independent life insurance policy—one completely separate from your mortgage loan.

Many people ask: Is it legally possible to have more than one life insurance policy at the same time? Will they both pay out in the event of an accident?
The answer to both questions is a resounding yes. While you can only insure a car for its exact value, human life has no legal financial limit. You can hold as many policies as you want, and the capital will be paid directly to your family, tax-free. (Folime Tip: The younger and healthier you are when you take out this secondary policy, the cheaper the monthly premium will be!)

The Math: How Much Capital Should You Insure?

The goal of a secondary policy is to replace the lost income over a relatively long period, usually until your children become financially independent adults.

Let’s use a clear example to help you calculate your needs.
Imagine a family where one parent has a net monthly salary of €1,000. If a fatal accident occurs, the household instantly loses that €1,000.

• The Mortgage Relief: Thanks to the bank’s life insurance, the €400 monthly mortgage payment is eliminated.
• The True Deficit: However, the family is still short €600 every single month for their normal living expenses (€1,000 lost salary – €400 saved mortgage = €600 deficit).
• Annual Deficit: €600 x 12 months = €7,200 per year.

Now, look at your children. If you want to ensure they are financially secure until they finish university (let’s say there are 16 years left until they graduate), you must multiply that annual deficit by the years remaining.

The Folime Formula:
€7,200 (annual deficit) x 16 years = €115,200.

In this scenario, you should take out a secondary life insurance policy for roughly €115,000 to ensure your family’s lifestyle remains completely uninterrupted.

The Most Critical Detail: The Disability Clause (IAD vs. ITP)

We must talk about the fine print: the disability coverage. Let’s be brutally honest. A sudden death is a tragic event, but a severe permanent disability can put a family in a significantly more complicated financial situation.

If you become disabled, the family still loses your income, but now they face skyrocketing new expenses: heavy medical bills, the cost of adapting the house for a wheelchair, or hiring third-party caregivers.

It is absolutely essential that both your mortgage insurance and your secondary policy contain a robust disability guarantee. But do not accept just any disability clause.

When reviewing your bank’s policy, look for these two acronyms:

• IAD (Absolute and Definitive Invalidity): Be extremely careful here. Most banks only offer this basic coverage. It only pays out in the most extreme cases (usually requiring a degree of disability of 85% or higher), meaning you are essentially bedridden or require a machine to live. If you get cancer and cannot work, but can still feed yourself, the bank will not pay off your house.
• ITP (Total and Permanent Invalidity): This is the coverage you actually want. It is much broader and usually triggers when you hit a 60% or 66% degree of disability. It guarantees that if an illness or accident simply stops you from continuing your professional career, the insurance will pay out the capital.

While ITP coverage might cost a few extra euros a month, the broader the concept of disability, the higher your true level of protection. Go check your current policies today and make sure your family is truly protected against all of life’s uncertainties.

Disclaimer: The information provided in this article by Folime is for educational and financial planning purposes only. It does not constitute formal financial or insurance advice. Always carefully read the specific terms, conditions, and exact disability percentages (Condições Gerais) of your individual insurance policy.