When buying property in Portugal with a mortgage, many buyers are surprised to learn that they may also be asked to take out a life insurance policy. While it’s not a legal requirement, life insurance is often required by lenders as part of their risk assessment – and whether or not it’s mandatory will depend entirely on the bank.
“It depends on the bank,” says mortgage advisor Alejandro Costa from DS Mortgages. “The life insurance is connected to the mortgage. The capital that is insured is exactly the capital you owe the bank, without interest. As you pay off the mortgage, the capital reduces.”
In short, life insurance acts as an additional layer of protection for the lender. If the borrower passes away before repaying the loan, the policy steps in to cover the remaining mortgage balance.
But this requirement isn’t one-size-fits-all.
Not all providers require a life insurance policy, but there are benefits to applying for one
“Banks ask for these extra guarantees when the LTV [Loan-to-Value] percentage is uncomfortable for that specific bank,” Costa explains. “Some banks dismiss the life insurance requirement at 70% LTV, some at 60%, others at 50%. Some will only demand it if the client borrows more than 80%. So if the client takes 79% LTV, they may not need it. It really depends on the risk policy of each lender.”
While the primary guarantee for the bank is the property itself – meaning that, in the case of default, the lender can claim the home – life insurance provides added reassurance that any outstanding debt will be covered without triggering the repossession process.
“Life insurance is nothing more than an extra guarantee,” Costa says. “The main guarantee is the property itself. But the bank’s risk department might decide that for a specific deal, the risk is higher than it should be, and that’s where life insurance comes in.”
Some mortgages in Portugal require you get a life insurance policy
The good news for buyers is that lenders in Portugal can no longer insist that the life insurance policy be taken out with them. While they may offer their own in-house product – sometimes with preferential mortgage conditions – borrowers are free to compare prices and take out a policy with any provider they choose.
“Many banks will demand you get life insurance,” Costa confirms. “But it’s no longer mandatory to get this life insurance with the lender. They can use other insurance brokers to give better and cheaper life insurance to the clients. We work with French and Spanish insurance companies that have tailored solutions for this specific client and are 50 – 60% cheaper than it usually would be.”
Whether you’re borrowing at a high LTV or simply want to protect your family, life insurance is worth considering. But be aware of the lender’s requirements, and compare offers to make sure you’re getting the best deal – not just on your mortgage, but on the policy that might come with it.
To find out more about your mortgage application for a property in Portugal, contact one of our expert partners.
