Can I Use Life Insurance to Pay Off My Mortgage?
Paying off a mortgage might seem to take forever, but a home is most families’ biggest asset and the more equity the home has, the greater financial security for the family. If a family should lose their main breadwinner, life insurance can help prevent financial ruin by providing funds to pay off the whole mortgage.
Some policyholders may want to pay their mortgage off while they are still alive — and there is a life insurance product that can help do that, too. Paying off large expenses is what life insurance is all about, and you just need to choose the type of life insurance that fits your needs.
Specific Mortgage Life Insurance Products
Mortgage life insurance is a certain type of insurance product designed to protect the repayment of a mortgage. In other words, this life insurance is dedicated to strictly paying off a mortgage if the policyholder dies. The policy does not provide any additional money to a beneficiary. This type of insurance protects the borrower, while private mortgage insurance, which many are familiar with, protects the lender in case the borrower defaults.
When initiating a policy, the policy’s face value must equal the outstanding balance on your mortgage. The policy must also terminate on the same date your mortgage is paid off. If you are considering mortgage life insurance, it helps to understand the way the policy works first. As the policyholder pays the premiums, the face value declines along with the remaining balance on the mortgage.
Mortgage life insurance pays handsome profits to lenders and insurance companies, while providing less and less over time for borrowers. No legal requirement exists for mortgage insurance — the buyer may choose to opt out of this type of life insurance. Lenders may offer incentives to buyers for purchasing mortgage life insurance along with their new home mortgage, and this is definitely a case of “buyer beware.”
Term Life Insurance
Term life insurance is a very popular product for many families. The cost can’t be beat, and the coverage is very straightforward. Term life insurance costs less than mortgage life insurance, and provides financial protection for defined periods, usually between 10 to 30 years.
If you, the policyholder, pass away while the term insurance is in force, your beneficiary receives the policy’s face value, most likely free of taxes. When choosing a term insurance policy, buy at least enough coverage to take care of your mortgage debt. Some term insurance policies may also be convertible to permanent life insurance.
Term life insurance accumulates no cash value, which keeps the rates low. You can pay for only as much protection as you need, and the face value stays the same even as you pay down your mortgage, unlike mortgage life insurance. Almost half of all life insurance policies written are term, and they are a favored option to provide the funds to help your family pay off the mortgage in the event of your demise.
Permanent Life Insurance
Permanent life insurance is another good option to help you pay off your mortgage. Whole life and universal life are both permanent life insurance policy types, although other variations exist. This type of life insurance costs more money in earlier years than term insurance, but the coverage stays in force for the rest of your life, as long as the premiums are paid.
For seniors, a whole life policy taken out when young and healthy can cost less than term insurance. Permanent life insurance pays interest in the form of dividends and accumulates cash value. You may decide to buy a permanent life insurance policy that has enough coverage to pay off your mortgage and other bills for your family if you should meet your demise.
Another option is to take a loan from your permanent life insurance policy. Taking a loan from your own policy is most useful when the policy is old enough to have accumulated a significant amount of cash value. Borrowing funds and paying off your mortgage allows you to pay smaller payments back to your policy or, in some cases, forgo payments altogether.
When you borrow funds from a permanent life insurance policy, the cash value of your policy stays the same and, in most cases, earns the same amount of interest. This helps offset the interest charged on your policy loan, which usually ranges from about 5 percent to 8 percent. The funds from your policy loan do not count as income, so you do not pay any tax on them.
Additionally, if you never pay the loan back, it will just be deducted from the death benefit paid to your beneficiary. The important thing to know about this kind of policy loan is that the balance, including interest, must not exceed the face value of the life insurance, or the policy will lapse. Depending on your individual circumstances, this may be prevented with payment of the interest portion of the loan. Before borrowing on an existing permanent life policy, discuss your plans with your broker to make sure you fully understand the process.
Finding Life Insurance that Fits Your Needs
Locating the right type of life insurance coverage has never been easier, now that the Internet can connect you with life insurance companies 24 hours a day. Request quotes online and do some comparison shopping, but do a little prep work first to make sure you have an estimate of your mortgage and other costs the policy needs to cover, as well as how much insurance coverage fits in your monthly budget.