Life Insurance for a Mortgage — Everything You Need to Know

Once you've found the right property, built the mortgage mixture, negotiated with the banks, and secured the best mortgage offer, it's time — as part of the collateral stage — to buy life insurance and property insurance for the mortgage. These policies are a condition for getting a mortgage (with a few exceptions). Here's everything you need to know about life and property insurance for a mortgage.

What is mortgage insurance?

Simply put, a life insurance policy covers the situation where one of the borrowers passes away. In that case the insurance company pays the bank the outstanding mortgage balance, settles the debt, and you no longer have to make mortgage payments. When you think about it, even if the banks didn't require a policy, it's good to have one. After all, the bank granted the mortgage based on the borrowers' income, and if one of them dies, the remaining borrower risks being unable to keep up the payments.

How does mortgage life insurance differ from regular life insurance?

First difference: who is the beneficiary of the policy?

Second difference: the insured sum and the monthly payment

Another difference between regular and mortgage life insurance is the insured sum — that is, how much money you receive in the event of death. With regular life insurance the insured sum stays fixed over the years. With mortgage life insurance, by contrast, the insured sum shrinks as time passes and you pay down your debt to the bank.

Because we don't get any younger, the risk of the policy being triggered rises. The monthly payment on both types of policy goes up over the years. But with mortgage life insurance, the monthly premium also comes down over time, because the policy amount shrinks as the mortgage payments progress.

When do you not need to purchase a mortgage life insurance policy?

I already have a life insurance policy — can I assign it to mortgage life insurance?

You certainly can. First, make sure the policy amount is at least equal to the mortgage amount and that it stays valid for at least as long as the mortgage term. Then ask the insurance company to pledge the policy to the bank and confirm the 30-day notice clause. Want to know how much you'll pay? Try our mortgage life insurance calculator.

What's the downside? Assigning an existing life insurance policy spares you from buying a separate one for the mortgage, so it cuts the extra expense. But then the policy beneficiaries (your dependants) can no longer benefit from the payout. If an insured event occurs, the outstanding mortgage balance goes to the bank, and only any surplus is passed on to the beneficiaries.

Considerations for choosing an insurance company and a discount plan

The premium you pay each month depends on the insured debt amount (the mortgage size, the type of loan tracks, and the number of years), your age at the time of payment, your gender, whether you smoke, your health, and the discount plan on the monthly payment.

So how do you know which of the discount plans on offer is the best fit for you? Here are two main approaches:

First approach: minimizing total payments in the early years

Here you choose a plan with very generous discounts in the first years that almost vanish after, say, three years. This plan is typically marketed to customers who care most about the lowest possible monthly payment (and/or who aren't aware of how the premium climbs) over time. It's worth choosing this plan:

• If you'll actively switch insurance companies over the years to keep enjoying big discounts. One important caveat: such a switch is only possible if you have a clean health declaration. So if you choose this plan and, heaven forbid, you fall ill in a way that raises your premium, you're stuck with it.
• If you intend to pay off the mortgage quickly, so only the payments in the coming years matter to you. That's the case if, say, you plan to upgrade soon or sell the property.
• If, for any other reason, you only care about the lowest payment in the first year — because of cash-flow trouble, for example.

Second approach: minimizing total payments over the long run

Here you want the total life insurance payments to be as low as possible over the years, which means you're not necessarily after the lowest monthly payment. When is it worth choosing such a plan?

• When you have a history of health issues. You want to be accepted for insurance and have peace of mind on that front.
• When you know you'll be in this home for many years and you're after peace of mind.
• When you have no way — or no interest — to keep tracking the cost of the insurance.

How to buy a life insurance policy — when you have no medical issues

Just as you negotiated to get the best interest rates, here too it takes some legwork. You need to gather quotes from the various insurance companies and compare them. You can do the legwork yourself and approach the insurers directly, or you can come to us — and we'll be happy to handle all the negotiation for you, free of charge!

Each insurer will ask you to fill out a health declaration, and if it's clean, you'll get a policy offer. Once you've finished comparing all the policies, you can have a life insurance policy within a day or two.

What happens if there are medical issues? There are solutions!

If you have medical issues (which will surface in the health declaration you fill out), insurers may require a series of medical examinations as a condition for coverage. These exams vary in type and scope, and they can take time — putting your ability to take out the mortgage on schedule at risk.

What happens if the exams aren't clean, or don't satisfy the insurer? In that case the insurance company can make one of three decisions:

1. Turn us down for coverage— in that case we'll want to keep trying for life insurance with other companies, request an exemption, or buy "life-shortening disability" insurance. This is an expensive policy, granted up to 50% of the mortgage or up to 500,000 NIS, whichever is lower. There's a waiting period of two and a half years (meaning that if you die within the first two and a half years, the insurance isn't in force).
2. Accept us with a risk premium that reflects the risk tied to your condition. A good insurance agent, by the way, will work to reduce or even eliminate this premium.
3. Accept us at the standard price. This is, of course, the outcome we're hoping for.

What should you do if you have medical issues?

1. If you already have a life insurance policy, you need to decide whether to assign it to the mortgage. Assigning it saves you the added premium (since you already completed a health declaration in the past), but your dependants will no longer be the beneficiaries and won't receive the payout — the bank will. If you don't have insurance you want to assign, move on to the next point.
2. If you've decided to buy life insurance, it's a good idea to reach out to insurers at the very start of the mortgage process to get a regular life insurance policy. Once it's approved, simply assign it, or have the same insurer issue a policy tailored to the mortgage. Our insurance team will be glad to handle this for you. Just contact us.

Good luck!