How can I get mortgage protection with a life insurance policy?
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Asked October 1, 2012
The family home is an important investment that should be protected. If you should die before the home is paid off, a life insurance policy can be used to pay off the mortgage and take the financial burden off your surviving family. Mortgage life insurance is a decreasing value term life policy that is designed specifically to pay off the mortgage, but it may not always be the most effective choice financially.
A decreasing value term life insurance life policy such as mortgage insurance has the drawback of having equal premiums throughout the course of the policy while the face value of the policy decreases over the same period. Since the mortgage value goes down over time, a mortgage insurance policy loses value in a corresponding fashion. This is a less expensive type of policy that a standard term life policy, but the decreasing value means that the policy will not be any assistance to your family beyond that.
A whole life policy can be used to pay off the mortgage, but it tends to be more expensive. Since the value of a permanent life policy remains the same or even increases over time, this type of solution will not only pay off the home mortgage, it the remaining value of the policy can be directed to one or more family members or even earmarked to pay off other family debts. Additionally, many permanent life insurance policies provide a financial vehicle that can be useful to you while you are still alive, allowing you to borrow against the cash value of the policy without a credit check or the need of putting up collateral.
In most situations, a term life insurance policy will provide you with the best mortgage protection. Standard term life policies are a little more expensive than a decreasing value term policy, but they have a fixed payout. If you were to purchase the policy at the same time as your home, and based the policy value on your mortgage value, then passed away halfway through the mortgage, the policy would pay off the mortgage and provide your family with a windfall equal to half the cost of your original mortgage. This could be used to pay other bills or even channeled into a trust that paid the utilities on the home indefinitely.
Answered October 1, 2012 by Anonymous