Your mortgage life cover costs €500 more for not asking

Your bank sold you the life policy on the day you signed, at the notary's office, with the pen still in your hand. Put the two bills side by side: the bank's policy, 730 euros a year; identical cover taken out with an outside insurer, 230. Five hundred euros of difference every year, and the law lets you switch without losing the discount they gave you for holding it.

Let's start with the arithmetic, because that is what decides.

Take a loan of 150,000 euros over 25 years, life cover for the outstanding capital, and a borrower aged forty. The two figures above are one case, not a price list: the premium depends on age, on the capital insured and on whether total permanent disability — the kind that keeps you out of any job at all — is included. But the order of magnitude repeats itself as soon as you ask for two quotes, because the policy the bank places is sold with a high distribution commission and the outside one competes on price. Those 500 euros a year are 12,500 over the life of the loan.

Against that stands what you would lose if you simply cancelled the bank's policy. The rate discount for holding it usually runs from 0.10 to 0.30 percentage points. With 0.20 points, over a balance that starts at 150,000 euros and ends at zero — averaging some 87,000 across the loan — the saving comes to around 174 euros a year: about 4,300 euros over 25 years. That is why cancelling the bank's policy without putting another one in its place works out badly: you lose those 4,300 euros of discount and you are also left without the cover the loan requires as security, which is exactly what entitles them to ask for it. What the law allows is the other thing, and that is where the money is: swapping it for an equivalent policy, keeping the discount and saving the 12,500.

The rule is Law 5/2019, of 15 March, governing real estate credit agreements: the mortgage law that brought a European directive into Spain. Its article 17 bans tied sales, that is, making the loan conditional on buying another product. It does allow bundled sales: the bank may offer you a discount on the interest rate if you take out the insurance, the pension plan or the card. Tied means "if you don't sign it, there's no mortgage". Bundled means "if you sign it, I'll cut your rate".

That same article says three more things, in this order. That the bank may require damage insurance on the property and, where it asks for it as security, life insurance. That it must accept alternative policies from any provider offering equivalent terms and an equivalent level of cover. And that accepting them may not entail any worsening of the conditions of the loan, of whatever nature. The rate discount is a condition of the loan: if they take it away from you for bringing an equivalent policy, the loan has got worse. Charging you for examining the new policy is also banned by the article, in those words.

Everything hangs, then, on a single word: equivalent. And equivalent means four very concrete things, worth having in writing from day one: the same capital insured, normally the outstanding amount, or the original one if that is how it was signed; the same cover the bank's policy had, so that if theirs included total permanent disability yours does too; the lender named as beneficiary for the amount of the debt; and no exclusion that theirs did not have. If the outside policy covers less, the bank is right to reject it and the fight is lost before it starts.

With that in hand, the paperwork is three moves. Get the terms and conditions of your current policy, both the general and the particular ones, not the brochure summary: that is where you copy the capital, the cover and the exclusions you have to match. Then ask two or three insurers for a quote with exactly that cover, and have them put the lender in writing as beneficiary for the outstanding balance. And hand the new policy in at your branch through a channel that leaves a trail — email or the online banking inbox, never by word of mouth — asking for express confirmation that the discount stays. Do it a good month before the annual renewal date, or the old one will roll over by itself.

If they say no, or say yes and then raise your rate, complain in writing to the bank's customer service department, which has one month to answer a private individual. If it does not answer, or answers no, the complaint goes on to the Bank of Spain; if the one digging in is the insurer, to the Directorate-General for Insurance and Pension Funds.

And one last warning, because this is where the most money is left behind without anybody protesting. If the premium was paid in one go and financed inside the loan — the so-called single premium — and you later repay the mortgage early, you are entitled to a refund of the part of the premium you are no longer going to use. There can be years of cover paid in advance sitting there, and the insurer will not move it until you ask.

Check your policy's renewal date before you close this. In the case above the two figures were 730 and 230 euros a year for the same cover and the same capital: 500 euros of difference inside a bill that was already being paid.