Life insurance is an insurance policy that covers the risk of death, survival and disability. Life insurance covers risks that may affect the existence, integrity or health of persons. In order for the insurance to be effective, an insurance contract must be formalized.
Life insurance
Life insurance is a specific type of insurance within personal insurance.
Parties to the life insurance contract
The insurance contract or insurance policy is made between the insurer and the policyholder – the person who signs or subscribes the contract, who is usually, but not necessarily the insured. The insured is the person to whom the insurance or coverage applies. The beneficiary is the person indemnified according to the terms of the contract or policy. In a life insurance policy, the policyholder, the insured and the beneficiary may be different persons.In a life insurance policy, the policyholder, the insured and the beneficiary may be different persons.
Life insurance is considered a pure sum insured contract, i.e. the sum insured is freely and voluntarily agreed and fixed between the parties – the policyholder and the insurance company.
Usually in the case of death insurance, if in the contract the policyholder and the insured are different, the consent of the insured in writing is necessary (according to the legislation of each country), unless his interest in the existence of such insurance is evident. If the insurance is waived, the insurance company will cease to cover the risk and the policyholder will be entitled to a refund of the premium he/she has paid.In the event that the insurance is waived, the insurer will cease to cover the risk and the policyholder will be entitled to a refund of the premium paid.
Types of life insurance
The insured receives the insured amount in case of death – or life insurance – the insurer pays the insured the amount of the insurance, provided he/she lives to the expiration of a certain period of time.
The payment of a periodic annuity may also be agreed upon for as long as the insured person lives, starting on a date established in advance.The payment of a periodic annuity may also be agreed upon.
Insurance payment
In contrast to tort law, which takes into account the damages suffered, in life insurance the insured amount is the amount to be paid by the insurer. This is the most important difference between the insurance of damages, where the indemnity for the insured is fixed in relation to the damages actually caused, and that of persons – in which life insurance is included – where the insurer’s benefit is stipulated by the parties beforehand and regardless of the damages caused.In the case of life insurance, the insurer’s indemnity is fixed in relation to the damages actually caused.
Life insurance obliges the insurer or insurance company to pay the beneficiary a capital sum, an annuity or other agreed benefits in the event of the death or survival of the insured. Life insurance may be taken out on one’s own life or that of another person (a third party) and may also be an insurance covering one or more persons.Life insurance may be taken out on the life of the insured.
Life insurance associated with the formalization of mortgages
A specific type of life insurance is when it is associated with a mortgage (usually a real estate mortgage). It consists of an insurance policy that covers the mortgage loan debt which is normally taken out on the purchase of a home in the event of death or disability of the mortgage life insurance holder. It may not be mandatory but banks usually require it for the granting of the loan. Life insurance is not mandatory to formalize the mortgage.
In principle, the life insurance associated with a mortgage covers the outstanding amount of the loan, but the types of mortgage life insurance are much broader. The banks, often unilaterally, modify the clauses (in some cases abusive clauses such as the floor clauses, on the reference interest rates as well as the clauses of expenses on the formalization of the mortgage) according to their interests, the risk of the debtor, the foreseen terms of amortization, etc.
When the home purchase contract is formalized, the mortgage loan contract is signed at the same time (there are two notarial deeds) and the life insurance policy is also taken out at the same time.
Usually the so-called mortgage life insurance policy is an annual premium that must be recalculated since from one year to another the outstanding capital (which will be the one we insure) will decrease (especially if amortizations are made), but at the same time the insurance risk increases since the age of the person increases and therefore the possibility of his death.
Mortgage life insurance by premium term
The life insurance associated with the mortgage can be classified by the duration of the mortgage life insurance premium, usually annual premium (reviewed annually), but can be single premium (duration of all or most of the credit) and also and monthly very uncommon practice.
Annual premium mortgage life insurance
This is the most common. The premium or quota is paid in advance each year and each year the cost is revised according to the outstanding capital and the age of the insured. The premium if the life insurance is for outstanding capital decreases each year as the outstanding capital decreases (although the risk also increases due to the increase in age) and will decrease proportionally to the capital amortizations that may be made.
Single-premium mortgage life insurance
Usually, when the home purchase contract is signed, the mortgage loan contract is signed at the same time (there are two notarial deeds) and also at the same time the life insurance policy is taken out and the premium is paid in advance for a number of years which may or may not cover all the years of the loan.
Mortgage life insurance by sum insured
Outstanding principal mortgage life insurance
This is the most common and the one that most benefits the insured as the premium decreases year by year. In this case the insurance is updated every year according to the outstanding debt with the bank. As the insured capital becomes smaller and smaller, the cost will go down, although as the age risk increases, it will be compensated, but at least the price will remain stable over the years.
This type of insurance is especially advisable when partial amortizations are foreseen, since when the policy is reviewed annually the premium will go down and therefore the cost will be substantially lower.
Whole capital mortgage life insurance
The amount of the mortgage life insurance does not vary and is constant over time, coinciding with the initial amount provided by the lender.
This modality means that even if the outstanding capital decreases, the premium or installment is not reduced. If death occurs (the causal event that activates the insurance) the bank should only keep the outstanding amount of the credit and the rest of the amount received by the insurance should be collected by the insured or his heirs. It is necessary to pay special attention to the clauses, which can be abusive clauses, and which would guarantee that the whole amount would be received by the bank when we have been paying for the insurance. Furthermore, in this case, as the age of the insured increases, the risk increases and the premium or quota may increase year by year instead of decreasing as in the case of outstanding capital life insurance.
Individual and shared mortgage life insurance
The purchase of the house can be carried out by one or more persons, so the calculation of the insurance becomes more complex. In the case of two people, they can insure the capital in equal parts for which it will be necessary to take out two insurance policies for the insured amounts. Each insurance will have a policyholder and a different risk or premium, depending on the sex and age of the policyholder. If one dies, the other will have to take care of his or her part only. However, it is sometimes convenient, if one of the partners does not work or has little income, to cover 100% in case of death or disability of one of the two partners in order to protect the one who has little or no income. It is also possible to share the burden proportionally to the actual income.
Life insurance registration
On numerous occasions, life insurance policies, due to lack of knowledge of their existence by family members or relatives when the causal event occurs (death, disability, invalidity, etc), remain uncollected. To avoid this situation, depending on the legal obligation in the different countries, there are life insurance registries that can always be consulted to find out if there is any life insurance policy whose holder is the deceased or disabled person. In order to avoid this situation, there are life insurance registries that can always be consulted to find out if the deceased or disabled person is the holder of the policy.
The main function of the life insurance registry is to prevent life insurance policies from going uncollected due to the beneficiaries’ lack of knowledge of the existence of the policy.
This casuistry is quite common and this mechanism was created to avoid it as much as possible. The purpose for which it was created is to provide the necessary information so that interested persons have the knowledge of whether a deceased person had insurance in case of death and who is the beneficiary of the life insurance.
