When you purchase a home, this usually will be one of the biggest financial obligations of your life. Your life insurance policy will become essential in your financial planning, especially when buying a home with a spouse or loved one.
In 2015, homeowners median monthly mortgage payment was $1,030 according the U.S. Census Bureau. Mortgage payments amounted to about 14% of pre-tax income among homeowners.
Most families today are a two income household, so it’s easy to understand how a death or disability could put a strain on making the mortgage payment. The last thing anyone wants is for their family to have to move or worse become homeless, especially when a little planning can ensure this doesn’t happen.
Life insurance can take the “what ifs” out of life and here’s how.
Mortgage Protection Insurance…The Good
Mortgage protection insurance is a decreasing term policy that is sold through the bank and is usually offered around the time of closing.
Mortgage protection insurance puts a spotlight on probably the biggest financial obligation of your life and designates money specifically to pay off the remaining mortgage balance. This can be crucial for loved ones, especially if the loved one is not used to handling the household finances everyday.
Mortgage protection insurance is often used when the homeowner or homeowners have health problems and wouldn’t qualify for a tradition life insurance policy. If you have significant health problems this would be the route to explore.
These types of policies are also effective if your job occupation is considered high risk and traditional products are not an option.
Mortgage protection insurance takes the guesswork out of life insurance planning. The death benefit is always equal to the balance on your mortgage so there is no questions about your loved ones future housing.
Mortgage Protection Insurance…The Bad
A major drawback to mortgage protection insurance is the decreasing benefit while the premium remains the same.
- For example, lets say you are 20 years into your 30 year mortgage which started out at $250,000. Your initial premium of your mortgage protection insurance ($50/month) was based on the $250,000. Now you owe $100,000 on your mortgage, which means the benefit on your mortgage protection insurance is $100,000 with the same $50/month premium. Not a great deal.
Another major issue we have with bank sold mortgage protection insurance is that the lien holder (usually the bank) are the beneficiary of the policy, hence the money is used to pay off remaining mortgage balance. Any funeral expenses or other debts are the responsibility of your heirs.
Also if you are somewhat healthy, mortgage protection insurance is not going to be the most cost-effective. You could save a substantial amount of money buying a typical term life policy over a 20 or 30 year period.
Options Other Than Mortgage Protection Insurance
Probably the best and less expensive option to protecting your mortgage is a traditional term life insurance policy.
Traditional term life policies come with a level premium, but the death benefit remains level for the benefit period that is chosen. You can choose between 10-30 year benefit periods to align with the length of your mortgage.
Term life policies also allow you to choose a beneficiary or beneficiaries. This can be your family or loved ones, even to charity. The beneficiary would receive a tax-free death benefit, which allows them to be in control of how the money is spent. This might mean paying off the mortgage along with other debt and funeral expenses.
Traditional term life policies also provide (usually at an extra cost) riders that also meet pressing needs when you purchase a new home. These are:
- Disability Income Rider
- Living Benefits Rider
- Accelerated Death Benefit Rider
- Waiver of Premium Rider
- Return of Premium Rider
Let look a little bit more into what these riders actually offer:
Disability Income Rider: This benefit provides a monthly payment to the insured, usually up to $2,000 in the event the insured were to become disabled and could not work.
The riders usually have a 90 day elimination period (which means no benefit the first 90 days) and a 2 year benefit period (which means they will pay you for 2 years after the 90 day elimination period).
This could be crucial if you have no disability insurance in place since it takes an average of 2 years to qualify for social security disability income through the government.
Living Benefits Rider: This rider is a fairly new concept that is catching fire with the life insurance carriers. How this feature works is if you were to be diagnosed with a major health issue, such as heart attack, stroke, cancer, etc., you are able to access up to 24% of your death benefit annually. You can use the money for anything, like paying bills, medical care, or even taking a vacation.
Accelerated Benefit Rider: The accelerated benefit rider allows the insured, if diagnosed as terminally ill, can access up to 80% of death benefit to pay for any needs. Terminally ill is defined as having a doctor diagnose you with have 12 months or less to live.
Waiver of Premium: This feature comes into play if you become disabled and cannot afford the premium payment. If you have this rider and become disabled, the insurance carrier will pay for the policy until you are no longer disabled. The insurance carrier even continues to pay after the benefit period of a term policy has expired as long as you are disabled.
Return of Premium Rider: There is nothing better than getting to the end of the benefit period of a term life policy and still being alive, until you realize that you have paid into a policy for 20-30 years to get nothing in return except for the peace of mind. Well the good news is that some insurance carriers offer a return of premium option which allows you to receive all premiums paid back at the end of the term period chosen.
Permanent life insurance is not used as often as term life insurance in terms of mortgage protection insurance. The main reason for this is the cost of permanent life insurance is more expensive compared to the cost term life insurance.
Although there are some options you have with permanent life insurance policies that fit some clients.
- Permanent life policies last forever so you are able to maintain the death benefit even after you have paid your mortgage off.
- The premium is locked in at whatever age your purchased the policy.
- Permanent life policies build up cash value that can be used to pay your mortgage off early.
If you own a house it is very important to have some type of life insurance in place in the event of tragedy. Whether it is a bank sold mortgage protection life insurance policy or a traditional term, it is important to have something in place. Always consult with a experienced insurance agent to help explain each policy in detail to ensure you make a smart financial decision. If you have any questions please leave a comment of give us a call.