June 24, 2021

Mortgages: what happens if the borrower dies?

In most cases, your house or flat is your family’s most valuable asset. It is your home and the place where your memories are, which makes it precious. Perhaps you have also invested in a second home or a commercial real estate property that you financed with a real estate credit or mortgage. However, what happens if you die? What will your loved ones have to deal with and how can you ensure that they will be able to continue living in your house, even when you are gone? A loan balance insurance policy is essential to protect your heirs and solidify your property plans with total confidence.

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The role of loan balance insurance

In the absence of a specific mechanism, your family inherit your assets and your debts. If this is the case, a mortgage payment can really weigh heavily in a monthly budget.

A loan balance policy prevents your partner or your family members having to pay the mortgage themselves. While not compulsory, this kind of insurance is now strongly recommended, be it imposed or not by the bank that issues your mortgage.

How does this kind of insurance work?

Loan balance insurance guarantees the bank payment of the capital amount borrowed. If you die before the term of your loan, the insurance company reimburses the bank on your behalf. The amount insured corresponds to the mortgage amount still to be repaid. Therefore, it decreases over the life of the policy.

Depending on the type of policy purchased, the coverage also works for risks other than death. For example, if you were to become completely and definitively unable to work as a result of an accident or illness.

What if you have already experienced major health issues, such as cancer? Luxembourg recently saw the introduction of a “right to oblivion“. Eight insurance companies that offer “loan balance” insurance signed an agreement with the Luxembourger Ministry of Health and the ACA (Luxembourg Insurance and Reinsurance Association). The purpose of this agreement is to facilitate access to loan balance policies for individuals who are at risk because of cancer, under certain conditions.

An option with tax advantages

The premiums you pay for your loan balance insurance can be paid annually or in a lump sum. In that case, you pay a single premium.

Regardless of your choice, your premium is deductible from your income tax. This deduction is capped at €672 per year. The amount is doubled if you are married and/or per additional child. In the case of a single premium, the deductible amount is increased.  

Up to an additional 672 euros per year for each additional person living in the household.

Taxpayer Single With spouse
Without children 672€ 1 344€
Per additional child + 672€ + 672€

The annual deductible limit increases for single premiums.

Taxpayer Increase for ages 30 and underAdditional increase ages 31 to 49 (per year) Maximum deductible ages 50+
Without children 6 000€480€ 15 600€
Per additional child 1 200€ + 96€ 3 120€

Compare before you buy

The bank from which you obtain your real estate credit/ morgage may also offer you loan balance insurance. Please note that the insurance is not required and that you are free to purchase this insurance from the insurance company of your choice.

Just as you compared the mortgage offers from multiple banks before taking a decision, spend some time reviewing the offers and coverage in order to pick the insurance policy that best meets your needs.

Other steps to consider

Keep in mind that there are other insurance products that can help you to further protect your loved ones.

Your other credits (auto, personal) can be protected in the same way as your mortgage: these are specialised loan balance policies.

You can also combine pension contingency benefits and death insurance. In this case, you save money to supplement your income after retirement, while guaranteeing the disbursement of funds to your loved ones if you die. These also come with tax benefits: a portion of the premiums are tax deductible. Find more information about these advantages here.

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