In short
- Banks require life insurance to approve a mortgage. They usually offer their own, but you can often present your own policy with a collateral assignment to the bank.
- The bank's policy protects the bank: it pays off the loan balance. Your own policy can protect your family too.
- Compare both before you sign the mortgage. The difference can be large in coverage and, if you're young, in price too.
Why the bank requires life insurance
If you die, the bank wants the loan repaid without foreclosing on the home. That's why mortgages in Panama require life insurance covering the debt, plus property (fire) insurance on the home.
The bank's policy
It's a group policy the bank holds with an insurer, and it enrolls you in it. It's convenient because it comes with the loan paperwork, but it has three features worth knowing:
- It covers the balance, nothing more. If you die, the bank is paid what you owe. Your family keeps the house but receives no money to live on.
- It shrinks with the loan. As you pay down the mortgage, the coverage goes down, though the premium doesn't always drop at the same pace.
- It stays with the loan. If you refinance or switch banks, you start over, and you're older.
Your own policy, assigned to the bank
The alternative is to buy your own life insurance and assign benefits to the bank up to the loan balance. If you die, the carrier pays the bank what you owe first, and the rest goes to your family.
- The policy is yours: if you switch banks, you assign it to the new one.
- You can choose a death benefit larger than the loan and protect your family's income too.
- If you buy it young, you lock in a low premium for many years.
- With a permanent policy, like universal life, you also build cash value you can use during your lifetime.
Each bank has its own requirements for accepting an outside policy (minimum coverage, approved carriers, assignment format). Part of my job is handling that with the bank so it's approved without delaying your mortgage.
The bank's policy protects the debt. Yours protects your family, and pays the debt too.
How much coverage do you need?
As a starting point, add up your mortgage balance, other debts, your kids' education costs and several years of your income. The life insurance calculator does it in two minutes.
Signing a mortgage soon?
Before you accept the bank's policy, let me quote you your own. If it makes sense, I'll handle the assignment with the bank.