Is Mortgage Life Insurance Mandatory?

For many families, taking out a mortgage is the biggest financial decision of their lives. Between the commissions, bonuses and linked products offered by banks, a very common doubt arises: is life insurance compulsory for the mortgage, or is it a negotiable condition that is not always necessary?

This article provides you with a clear and up-to-date guide – based on current regulations and actual banking practice – to help you make the best decision. Knowing your rights can save you hundreds or even thousands of euros over the life of the loan.

Is mortgage life insurance compulsory under Law 5/2019?

The Real Estate Credit Contracts Act 5/2019 (LCI) marked a turning point in mortgage consumer protection in Spain. Its article 17 expressly prohibits the institution from imposing insurance or any other product without offering the customer an equivalent alternative. In other words, life insurance is not required by law; the bank can only require a policy to be in place if the contract so provides, and must accept an insurer other than the bank itself.

Property and casualty insurance vs. life insurance: what the law really requires

Home insurance (fire). It is mandatory when a mortgage is constituted, because it protects the value of the property that serves as collateral. This requirement derives from Royal Decree 716/2009.
Life insurance: it is not legally obligatory to take out life insurance. The law allows the bank to offer it as a bonus (for example, to discount 0.10 % in the interest rate), but the client can reject it or subscribe it with another company. This reinforces that mortgage life insurance is not compulsory, although many institutions suggest it.

Why do banks say that mortgage life insurance is compulsory?

In commercial practice, many institutions present life insurance as if it were a prerequisite. But in reality they use it to:

Reduce credit risk: in the event of death or disability of the policyholder, the policy pays off the debt and avoids default.
Increase cross-revenue: selling insurance generates commissions and builds customer loyalty.
Offer bonuses: they link lower interest rates to the contracting of various products (home insurance, life insurance, alarms, cards, etc.).

It is essential to understand that mortgage life insurance is not compulsory in legal terms. The client can accept the loan without bonuses, take out the insurance with another company or cancel it later without being penalised, as long as he/she maintains equivalent coverage.

Consumer rights: freedom of choice and cancellation of the policy

Consumer law and the Consumer Protection Act reinforce your freedom to decide on linked products. Although some banks insist that mortgage life insurance is compulsory, you have the right to:

Choose insurer: the bank must accept any policy that covers at least the outstanding principal of the mortgage.
Cancel or change company: you can do this at the annual maturity date, with the notice stipulated in the policy (generally 30 days).
Complain about abusive practices: to the bank’s Customer Service Department, the Bank of Spain or, if necessary, through the courts.

Advantages and disadvantages of taking out a life insurance policy linked to your mortgage

Although mortgage life insurance is not compulsory, there are reasons why it may be in your interest to take out one:

Peace of mind: in the event of death, the heirs do not assume the mortgage burden.
Disability cover: many policies include permanent absolute disability, protecting your ability to pay.
Automatic management: if the insurance is direct debited from the mortgage instalment, the debt is settled without any formalities.

Hidden costs, single premium and stand-alone alternatives

Financed single premium: Some institutions charge, at the beginning, insurance for the whole duration of the loan. It is financed and generates interest, making the mortgage more expensive.
Penalty for early cancellation: certain policies apply penalties or refund a residual amount.
Alternatives: Individual (non-linked) life insurance is usually cheaper and more flexible. In addition, it allows you to review capital and beneficiaries every year and adjust the premium to the outstanding debt.

Checklist before signing the mortgage

Read the FEIN and the FIAE: it will show whether the life insurance is a ‘linked product’ (compulsory) or a ‘subsidised product’ (optional).
Ask for an external offer: request a quote from several insurers to compare price and coverage.
Calculate the real savings: if the bonus lowers your interest rate by 0.10%, but the insurance costs an extra €400 per year, it may not pay off.
Assess your profile: if you are young and healthy, external insurance can be much cheaper.
Check exclusions: most policies cover death from any cause, but not always partial disability, pre-existing conditions or high-risk sports.
Check refund in case of early redemption or subrogation: some companies refund the unearned part of the premium.

Quick FAQ on ‘Is mortgage life insurance compulsory’?

Question	Short answer
Is it compulsory by law?	No, the LCI prohibits its imposition.
Can I choose another insurer?	Yes, as long as it matches coverages.
What about home insurance?	Yes, it is mandatory for fire protection.
Do I lose the bonus if I cancel?	The bank can cancel it, but you must assess whether it is worth it.
What happens in case of death without insurance?	The debt passes to the heirs, who can accept or renounce the inheritance.

José Sellés: your ally financial advisor Mallorca

In the decision to take out – or not – a life insurance policy linked to the mortgage, the small print makes the difference. José Sellés, financial advisor Mallorca, analyses with you the offer of your bank, compares policies on the market and calculates the real impact on your instalment and your family’s wealth. If you are looking for clarity, transparency and a tailor-made financial plan, book an appointment and become a well-informed homebuyer. We hope we have helped you resolve your doubts about whether mortgage life insurance is compulsory with this article.