Mortgage Life Cover: What the Bank Sells You vs What You Can Buy

You are at the notary's office in six weeks and the bank has just sent through the mortgage offer. Somewhere in it is a life policy you did not ask for, attached to the interest rate you were quoted. It is presented as part of the deal. It is not — you can buy that cover elsewhere, and the difference over twenty years is rarely small.

Why the bank bundles insurance with the mortgage

Spanish lenders routinely package seguro de vida and home insurance into the mortgage offer, usually by attaching them to a bonificación: a reduction in the interest rate granted in exchange for taking the bank's products. Salary direct deposit, a pension plan and a credit card often appear in the same list.

The bank is not doing anything improper. Insurance is high-margin business and the rate discount is real. What matters is whether the discount is worth more than the extra premium, which is a straightforward arithmetic question that very few buyers actually run.

What Ley 5/2019 says about your right to choose

The Ley reguladora de los Contratos de Crédito Inmobiliario, Ley 5/2019, sets the boundaries. In broad terms:

• The lender may require you to hold damage insurance on the property.
• The lender may attach life cover to a rate bonificación.
• You have the right to choose the provider.
• The lender must accept an equivalent policy from another insurer without worsening the terms agreed.

So the practical position is that the bank can insist on cover, but not on its own cover. If you present a policy with equivalent guarantees from another authorised insurer, it should be accepted and your agreed conditions should stand. Confirm how your own lender handles this before signing, because the internal process varies.

Prima única: the premium you pay interest on

This is the detail that costs the most and is explained the least. Bank-bundled mortgage life cover is commonly sold as a prima única — a single premium covering many years at once, financed into the loan itself.

That means the premium is added to the capital you borrow. You then pay interest on it for the full term. A single premium of, say, €6,000 rolled into a 25-year mortgage does not cost €6,000; it costs €6,000 plus a quarter-century of interest on that amount. It also increases the sum being financed, which can affect the loan-to-value calculation.

The alternative is a prima anual renovable: an annual premium, paid yearly, from an independent insurer. It is typically cheaper overall, with the trade-off that the premium rises as you age rather than staying flat.

Decreasing term or level term

Two structures do the job, and they suit different households:

• Decreasing term (capital decreciente or amortizable): the sum insured falls in step with the outstanding mortgage balance. Cheapest option, and it does exactly one thing — clears the debt.
• Level term: the sum insured stays constant for the whole term. Costs more, but as the mortgage shrinks the surplus becomes money for the surviving partner or the children, rather than money that quietly disappears.

Banks generally favour decreasing cover, because their interest is in the loan being repaid. Your interest may be broader than that, which is where general life insurance and mortgage-linked cover start to overlap.

How to compare the two offers like for like

Put the bank's proposal and an independent quote side by side and check the same points on each:

• Single premium or annual premium — and if single, whether it is financed into the loan.
• The sum insured, and whether it is level or decreasing.
• The term. A policy covering ten years of a thirty-year mortgage is not comparable to one covering the full term.
• What the bonificación is worth in euros per year, not in basis points.
• The annual cost difference between the two policies.
• Who the beneficiary is, and whether the policy is assigned to the bank.
• Guarantees included: death only, or death plus permanent disability.

Run the comparison over the whole term rather than the first year. Bank premiums often look competitive at outset and less so later, and the rate discount stays the same size while the premium gap widens.

What happens to the bonificación if you switch

If you cancel the bank's policy and replace it with an equivalent one, the discount linked to that product should continue, since the condition was that you hold the cover, not that you buy it from them. In practice, expect to have to evidence it: send the new policy documents to the lender in writing, keep proof of delivery, and check the following month's payment to confirm the rate has not moved.

Where a single premium has already been financed, cancelling mid-term usually entitles you to a refund of the unused portion, but the amount and the mechanism depend on the contract. Read the specific clauses, or have a gestoría read them with you.

Joint or separate policies for a couple

Two borrowers can be covered by one joint policy or by two individual ones. A joint policy is often cheaper and pays out on the first death. Two separate policies cost more but leave the survivor with cover still in place, which matters if the property is later remortgaged or if the couple separates. If the mortgage is split unevenly, the sums insured can be split to match.

The medical questionnaire is the whole contract

The health declaration determines whether the policy pays. Answer it fully and in writing, including conditions you consider trivial or historical. Non-disclosure is the standard reason a life claim is reduced or refused, and it surfaces at the worst possible moment, when the family is trying to keep the house.

Before you sign, read the FEIN and FiAE in the mortgage offer, identify exactly which products carry the bonificación and what each is worth, and get an independent quote for equivalent mortgage protection cover — then confirm your own position with your lender and a gestoría.