What happens when a mortgage holder dies? Everything you need to know about life insurance linked to a mortgage

A mortgage is undoubtedly the best tool available to help you buy a home, but have you ever thought about what would happen if a tragedy were to occur during the term of the loan?

Although it’s not a pleasant thought, the truth is that this is a question many mortgage holders are unable to answer.
Given the importance of this issue—especially in light of the financial implications it will entail—it is important to understand what will happen to your debt if something goes wrong during the process of purchasing and paying for your home.

Since prevention is always better than cure, when taking out a mortgage, it is essential to understand the protection provided by the associated life insurance and the legal obligations that must be fulfilled in the event of the policyholder’s death.

What is Home Life Insurance?

Although it is not required by law, home life insurance is an essential form of protection—required by the bank—for anyone planning to make a major investment such as buying a home with a mortgage, as it will serve as a safety net for you and your family.

In the event of disability, under the agreed terms, the mortgage life insurance will provide the financial peace of mind your family needs by ensuring that, in the event of the mortgage holder’s death, the home will be fully paid off.

However, home life insurance is not only meant to protect you and your family, but also the lending institution, since it serves as collateral for the loan. In other words, it ensures that the bank receives the amount of the loan granted, which is why these institutions usually require it when the contract is signed.

However, to ensure that the protection you’ll receive by purchasing a home life insurance policy is as comprehensive as possible, you’ll need to pay close attention to the coverage options.

## Home Life Insurance Coverage

As a general rule, mortgage life insurance in Portugal—depending on the bank and the type of policy you choose—offers you the following coverage:

• Coverage in the Event of the Insured's Death

If one of the borrowers—and therefore an insured person—dies, the insurer will ensure that the bank receives the outstanding loan payment. The contractually designated beneficiaries (legal heirs, for example) may receive excess proceeds if the insured amount exceeds the outstanding balance. However, nowadays almost all insurers adjust the coverage amount for inflation, so it is not certain that there will be any excess proceeds for the heirs.

• Disability Coverage

If you become disabled, your life insurance will cover this type of situation through two types of coverage that you should understand in detail so you can make an informed decision when purchasing the policy: Total and Permanent Disability (TPD) and Permanent Disability for Your Occupation or a Compatible Activity (ITP).
In the case of long-term care insurance (IAD), it will guarantee you compensation if you become dependent on others to perform basic daily activities, such as getting dressed, eating, or bathing.

In the case of ITP, disability coverage ensures that your mortgage payments will be covered if you become unable to perform your professional duties or any other work compatible with your abilities, skills, and knowledge, starting at a certain percentage, which can range from 55% to 66%

What happens if the life insurance policyholder dies?

As we have mentioned throughout this article, if one of the borrowers—who is also a guarantor—dies, the outstanding loan balance will be paid in full to the bank to settle the debt.

In this situation, the legal heirs will not receive any compensation, but they can rest assured that the property in question will remain in the family and there will be no further payments due to the bank on the loan.

At this point, it is essential to emphasize the importance of not only having life insurance linked to your mortgage, but also to ensure that the coverage amount is sufficient to pay off the entire debt to the bank, so as not to leave your family struggling with loan payments that would make it difficult for them to maintain their standard of living.

Even if it covers the loan in full, the death of the borrower will always mean that the household has one less source of income and, possibly, additional expenses.

It is also important to understand that if the policy names two insured individuals and one of them dies, since the insurance covers the mortgage, the proceeds are paid to the bank and the policy is terminated.

Therefore, if the surviving insured person wishes to remain covered, it is best to supplement the home life insurance with a “Family Protection” life insurance policy. This ensures that, in the event of disability or death, the death benefit will be paid to the insured person or their family.

So, if you've already secured your home, now is the time to protect your family by supplementing the life and home insurance with a Family Protection insurance policy that ensures the most important people in your life can maintain their financial independence in the event of a loss of income due to the death or disability of the life insurance policyholder.

Life insurance purchased through the bank vs. purchased through EXS

Although most banks require you to have life insurance when you take out a mortgage, Portuguese law does not require you to purchase it.
In many cases, purchasing life insurance outside of banks may actually be the best choice because, not only does the bank just want to sell you “that product,” but this insurance is often more expensive and may not provide the coverage you need.

In addition to the level of coverage, financial considerations always play a role when purchasing life insurance, which is why you should always take the time to thoroughly research and compare the different options available on the market, particularly with regard to the coverage they offer.

Fortunately, to help you cut through the red tape, EXS Seguros steps in to provide you with full support in this transfer process or purchasing life insurance outside of banks.

So, if you want to purchase a more competitive insurance policy without sacrificing the coverage you’ll receive, EXS Seguros will offer you—along with a wide range of insurance policies that provide the best value for money on the market—a specialized consulting service that will help you choose the best available option based on both of these needs by aligning your financial capacity with the available coverage and services.

Benefits of EXS Home Life Insurance

In short, when you purchase a standalone life insurance policy through EXS, you’ll enjoy the following benefits:

• More Savings: lower premiums of up to 60%;
• Greater Freedom: insurance independent of the bank;
• Comprehensive support: assistance from the simulation phase through to the insurance switch;
• A simple, fast, and transparent hiring process.
• Access to the best solution at the best rate, following a thorough comparison of the offers available on the market.

Conclusion

Taking out a mortgage is a huge responsibility that should always be accompanied by the highest level of protection for the investment made.

Life insurance linked to a mortgage typically includes several types of coverage: basic coverage, death coverage, and some form of disability coverage.

In the event of death, the amount goes to the bank where you took out the loan. In this case, your legal heirs or anyone you intended to benefit will not receive any money. To ensure that your family receives a lump sum in the event of your death, you should consider purchasing a “Family Protection” life insurance policy.

For more information on what the life and home insurance and how to extend protection to yourself and your family with a “Family Protection” life insurance policy, Ask EXS for help! Insurance to help you find the best coverage at the lowest price.