Purchasing Life Insurance to Address a Mortgage
Article by Dennis Jarvis
A common life insurance need that most people approach us with is the need to address a mortgage in the event of a financial provider passing away. This is actually a good use of life coverage that’s ideally suited to the world of term life (as opposed to whole life). Let’s take a look at how this works.
Take a quick look at your monthly budget. Where does the money go? There some things you can cancel (is that DirecTV NBA Pass really needed?) while others are core expenses that do not go away without some pretty significant changes in lifestyle. The glaring example of the latter is your mortgage or rent. The safe assumption is that a person’s mortgage shouldn’t exceed 25% of their gross income. Needless to say, many people forgot to heed this advice during the last decade and the mortgage has crept ever higher as a percentage of gross income. When considering your specific needs for life insurance, it’s important to understand what exactly a mortgage is.
We’ve been sold in the U.S. that a mortgage or your primary residence is an asset. The problem is that cash flow only goes one way with a mortgage outside of home equity loans which is just additional debt. A true asset should provide income or cash flow. Your primary mortgage does not. So from the point of view of making ends meet after a primary provider passes away, the mortgage is a liability. It’s something to be paid…or you lose the house and any connotation of “asset”. A secondary or rental house might be quite different since rental income should hopefully provide a net zero in cash outflow. So how do we address the mortgage liability with term life insurance?
The answer is “very inexpensively”. To some extent, term life is ideally crafted to address a mortgage from two angles. You can either take out the amount of term to match how much remains on your mortgage or to address the cumulative amount of payments that are still to be made against the mortgage. Mortgages are usually a responsibility for a certain period of time with the most common term (hint hint) being a 30 year mortgage. Term life can be purchased to directly meet this time nature of mortgages or to pay the mortgage outright. Which is the best approach?
It depends on your financial situation. If you use your term life payout to payoff the mortgage, will you be able to afford your other monthly financial responsibilities not to mention college expenses, etc that occur in addition. A surviving spouse may have his/her own income to address a level of expenses and feel that paying off the mortgage is the best approach. You really want to think this through and ideally discuss your situation with a license life insurance agent.
If possible, our favorite approach is to purchase enough term life insurance to provide income (interest, investment, etc) to address your monthly expenses including the mortgage. This really is the true function of term life insurance…to replace income. If you spend down your life insurance benefit quickly such as paying off a mortgage, you may find yourself in a financial bind later on from other needs. There’s also the danger with a lump sum payment of squandering the money and thus jeopardizing even the very mortgage that you originally planned to protect. Worst case, start with an amount that is invested to provide income for immediate financial needs including the mortgage and re-evaluate after a few years whether paying more of the mortgage is the right financial decision. These are big decision to make after such a traumatic event so it might be best to let the dust settle and then look at the mortgage question. You can always pay the mortgage at a later date but it’s harder to reverse course once you have paid off the mortgage.
About the Author
Dennis Jarvis is a licensed insurance agent concentrating on finding the online term life insurance. Shop, compare, and instantly quote multiple carriers with professional guidance and resources.