For most people, their home is their most significant purchase, their largest asset, and their highest monthly expense. Purchasing mortgage protection life insurance that will pay off or pay down your home upon the death of a loved one makes good financial sense for homeowners.
Although mortgage protection is a life insurance product, it is uniquely suited to protect your valuable home asset.
What is life insurance?
Life insurance will pay money to your beneficiaries upon death. For your beneficiary to get the proceeds of your life insurance policy, you must die. You or your loved ones will not have access to any of your life insurance funds before your death.
To qualify for fully underwritten life insurance, one must take a medical exam and test (blood, urine, diagnostics, height, weight etc.). Nonmedical life insurance options are also available through some companies.
Life insurance can be used in many ways after a death occurs:
- Income replacement
- Funding college for children
- Payment of debts
- Make mortgage payments or pay off home
- Paying off business debt
- Buying interest in a multi-owner business
- Pay off business loans
What is mortgage protection insurance?
Mortgage protection insurance protects your home should a loved one pass away unexpectedly.
Mortgage protection policies are most often non-medical life insurance policies with living benefits. Living benefits allow you and your family members access to the funds before a death occurs.
Terminal illness, disease, and disability contribute to families losing the home they have worked so hard to pay for over the years. These “living benefits” are often included as part of the mortgage protection policy and play a crucial role in protecting your home when life does not go as planned.
BOB & MARY MORTGAGE PROTECTION EXAMPLE
Bob and Mary have been married for 17 years and have a new home with a $250,000 mortgage. Both Bob and Mary work and have similar incomes. Bob has not been feeling well and went to the doctor and receives a terrible diagnosis of stage 4 cancer. It is diagnosed as untreatable, and Bob is given 12 months or less to live.
Within one month, Bob’s health is affected substantially, and he can no longer work. Because Bob can no longer work, Bob and Mary cannot pay all their expenses and are at risk of losing their home.
The only thing worse than dying is losing your home while you are dying and seeing your family suffer.
Because Bob and Mary had purchased a $250,000 mortgage protection policy that included a terminal illness rider, they requested and received $250,000 from the policy immediately, and months before Bob’s death.
Mary took $125,000 of mortgage protection insurance proceeds and paid it towards the mortgage balance. She then refinanced the mortgage to a lower interest rate and cut her mortgage payment by 58%.
By cutting the mortgage payment by over half, Mary could afford the mortgage after Bob’s death.
Mary also had the remaining $125,000 to replace Bob’s income in the coming year, pay medical expenses, replace her income while she took time off from work to care for Bob. Mary also wanted to help pay for their two children’s college expenses.
Bob also had a $60,000 life insurance policy through his employer that his employer was kind enough to keep making payments on until Bob’s death, so Mary would have access to $60,000 additional life insurance money.[/su_box]
Bob and Mary wished they had purchased life insurance in addition to mortgage protection insurance but were grateful for the decision they had made to protect their mortgage. There are also grateful they had work provided life insurance.
Mary will not be rich after Bob’s death, but she can keep her home and provide for her children without substantially altering her lifestyle, thanks to the decision Bob and Mary had made years before when purchasing mortgage protection insurance.
Why do people choose mortgage protection instead of life insurance?
Mortgage protection provides you the flexibility of protecting your home mortgage loan in a separate policy from your life insurance policy. Many families enjoy the flexibility of not having to pay a life insurance premium once the home is paid off.
Many couples apply extra funds each month towards their mortgage to pay their house off quickly.
If you have a 30-year mortgage and are paying an extra $100-$150 per month on your mortgage, you may only need a 15 or 20-year mortgage protection policy; this can save you money over purchasing a 30-year mortgage protection policy.
Why wouldn’t I just buy more life insurance?
You can increase your life insurance coverage, or just buy new life insurance coverage; we can help you with this too.
Life insurance underwriting and approval on a fully underwritten policy (blood, urine, medical, height, weight, etc. exam) can take 6 to 8 weeks.
Mortgage protection policies are often approved within days. Mortgage protection policies also include other benefits not present in fully underwritten life insurance policies.
By having two separate policies, a family can better manage their budget when less life insurance is required (by canceling an unneeded policy).
Most life insurance is purchased for income replacement when a loved one passes away.
If the spouse earns $50,000 a year, a $250,000 life insurance would provide the surviving spouse with replacement income for five years.
If you have a $250,000 mortgage, a $250,000 life insurance policy will pay off your mortgage, but there will be no remaining funds left to replace the deceased’s partners income.
Do I have to insure my entire home mortgage?
No, you don’t.
It is popular for spouses or partners to only ensure half of their mortgage. By doing so, this keeps the mortgage protection premiums low and affordable and allows the surviving spouse or partner to pay off half the mortgage and refinance the mortgage to cut their mortgage payments in half after a loved one dies.
Example: A couple had a $250,000 life insurance policy, and one of them died ten years after purchasing a mortgage protection policy when the mortgage balance is now $175,000.
If each couple had $125,000 mortgage protection life insurance policy, the surviving spouse or partner could apply the $125,000 in mortgage protection to the $175,000 home mortgage. They could then refinance the balance to have a $50,000 mortgage (and a very affordable mortgage payment).
Income replacement versus mortgage protection?
Income replacement is easy math. If you make $50,000 year, with five years’ worth of income protection, a $250,000 mortgage would be appropriate.
Mortgage protection is more flexible than income protection.
Because we don’t know when you will die, and your mortgage balance decreases over time, you don’t have to cover your whole mortgage. We are experts in helping you understand the options available to you and your loved ones.
I purchased a mortgage protection policy in the past through my lender?
These policies have been eliminated over the years and are no longer available through lenders. These policies paid off your home mortgage if you died while you still had the mortgage.
The funds would be paid to your bank or lender, and the funds would decrease over time as your mortgage balance decreased.
These policies were reasonably popular because of their convenience (you could apply during the financing process), but they had some drawbacks.
If you ever sold or refinanced your home, the policy terminated. When you died, the bank received the funds, so if you needed that money for other things (income replacement, doctors’ bills etc.), you would not have access to it for those purposes.
I purchased life insurance for $12 a month through my lender when I got my $250,000 mortgage loan.
Here, you actually purchased an accidental death life insurance policy.
This type of mortgage protection life insurance will only protect your home if you died because of an accident. Any other type of death, such as disease or illness, will not be covered by this policy.
I have private mortgage insurance (PMI) included in my loan and mortgage payments?
PMI protects the bank should you default on your loan; it does not protect your spouse or loved ones should you die unexpectedly.
If you did not put 20% down on your home purchase when you financed your home, the lender would automatically make you pay PMI until your mortgage balance is 80% of your home’s current value.
Private Mortgage Insurance (PMI) is not Mortgage Protection Insurance (MPI).
What if I was sold an expensive mortgage protection policy?
The good news is that your home is protected…even if you are overpaying.
Now would be a great time to review your current policy to see if we can save you money. Remember, you will be paying your monthly insurance premium for 180 to 360 months. A $20 monthly savings will save you $7,200 over 30 years.
If you have the best plan available, we will let you know. If you don’t have the best plan, we can help you keep a serious amount of money in your bank account (instead of the insurance companies bank account!)
Protecting future generations
Most couples dream of the day at their home will be paid off and they can enjoy a life of mortgage payment free living.
Most couples want to see their surviving spouse or partner remain in the home after their death.
A mortgage protection policy can assure your loved ones and family will not lose your home after your death.
Mortgage protection policies and life insurance policies are “generation protectors.” When loved ones die and have no mortgage protection or life insurance in place, it will negatively affect your family and those around you for generations to come.
It makes sense to pay a little now for mortgage protection life insurance to protect your family for generations to come.
If you are considering mortgage protection, call us to help you understand your mortgage protection life insurance approval options.
At Life Wealth Win, we specialize in healthy to high-risk life insurance cases. We can help you understand your mortgage protection life insurance needs and options.
We work with clients across the nation to get the best life insurance rates possible. If you have a mortgage you want to protect, we can help you get the best life insurance rates.