Roughly 63% of Americans own a home.
Your home is likely your largest – and your most valuable – investment. But if you pass away before you’ve paid off your mortgage, you could leave your family with the risk of losing the home.
Did you know that about 26 percent of Americans do not have any emergency savings? This means that it’s up to you to start thinking of a way to protect your family and your home in the event of your death.
One of the most popular ways to ensure your loved ones can continue to make mortgage payments after your death, and keep their home?
Taking out a mortgage life insurance policy.
Here, we’re telling you everything you need to know about the policy, including where and how you can find the right one for you.
Mortgage Life Insurance: A Basic Definition
Before we get into the specifics of understanding mortgage life insurance, hang on. First, let’s talk about what it is in the most essential form.
If you’re a homeowner, you’re likely already used to paying fairly large mortgage payments every month.
In the event that you pass away, those mortgage payments don’t just disappear. They fall to the people that you’ve left behind.
They then become financially responsible for the mortgage on your home.
A mortgage life insurance plan, which is referred to as decreasing term life insurance policy, can help to protect your loved ones financially.
This policy is designed to help your loved ones manage paying the leftover balance of your mortgage if you die.
As with regular mortgage plans, every time you make a payment your debt goes down. As you decrease your debt, the amount and length of coverage you need also decreases.
While the amount you’re covered for gets lower every time you make a payment, the monthly premiums don’t change. Still, you’ll likely have lower premium payments each month. They’ll certainly be lower than you would pay with other life insurance policies.
Keep in mind that your family is not the official “beneficiary” of the policy in the event of your death.
Instead, the mortgage lender is the beneficiary. It’s your policy that pays off your remaining mortgage, so you family isn’t held financially responsible.
So, your family isn’t getting a lump sum to spend on whatever they wish, nor to repay other outstanding debts. Still, the benefits will pass to the mortgage lender tax-free, which will take pressure off your family, too.
Basically (as morbid as it sounds) the earlier in the policy you pass away, the higher your payout. Why? Because you would die with more debt owed to the lender.
What Else Should I Know?
First, let’s quickly clear up any confusion you may have about how this policy differs from a regular level premium term insurance policy.
In level term insurance, if you pass on, your family is given a lump sum. This is to cover mortgage payments and other debts and fees.
Since the lump sum will not change in amount no matter when you die during the term, it has higher premiums than a decreasing term policy.
Also, if your home loan is an interest-only option, you may need to think about taking out a different type of policy. That’s because in that situation, the amount of your debt won’t be year over year.
Most importantly, if you’re taking out mortgage life insurance, please speak with your broker. You need to make absolutely sure that the length of you actual policy and the length of the mortgage are the same.
If, for whatever reason, the term on your overall mortgage policy changes, you’ll need to speak with your insurance broker as soon as you can. Ask them about getting a different mortgage insurance policy, as well.
Wait – What’s Private Mortgage Insurance, Then?
As you may have expected, your mortgage insurance doesn’t have to be a one-size-fits-all solution.
We want to make sure you clearly understand the differences between Private Mortgage Insurance and Mortgage Life Insurance. This way, you won’t pick the wrong plan.
Private Mortgage Insurance is something you buy through your actual lender.
Essentially, this option is required in case the down payment on your home has not gotten to a certain point.
This is a mortgage insurance policy that isn’t actually related to your death (or if you become disabled.) Rather, this is around to make sure that your lenders are paid if, for any reason, you default on your loan. You pay the premiums yourself.
Mortgage Life Insurance, as discussed above, is the option you’re looking for if you want to make sure your family is not held responsible for paying for your home themselves if you die early.
As you can see, it’s easy to get confused with so many overall life insurance policies out there. It’s also tough to keep all the different options when it comes to mortgage insurance straight!
That’s why we advise working with a qualified broker or financial firm. You can make sure you don’t make a mistake that’s going to leave your family in financial ruin or hardship.
Where Can I Get Help With Mortgage Life Insurance?
First of all, remember that this isn’t your only option when it comes to a life insurance policy. In fact, it’s fairly common these days that people include term life insurance as part of a larger life insurance or mortgage protection plan.
You could also look into so-called “First To Die” life insurance, which transfers the entire death benefit to a designated family member (most often a spouse.)
Then, your spouse could use the money to pay down the mortgage.
The lesson here? This can get confusing, fast.
If you want to talk more about the policies available to you, are looking for more resources to read to educate yourself, or if you’re ready to take out a policy, you have options.
Make sure you’re working with people you can trust.
We’d love to help you sleep well at night knowing you’ve taken every step possible to protect your family.
Feel free to contact us if you need help selecting a life insurance company or general insurance advice.