More on Life Insurance
More on Life Insurance
Homeowners should consider a term life insurance policy that matches the length of their mortgage, so it can be repaid if they die.
Buying a home and securing a mortgage often means committing to decades of financial obligation. As of February 2021, nearly two-thirds of Americans owned a home, according to the U.S. Census Bureau. And despite the ongoing coronavirus pandemic, first-time homebuyers made up about 31 percent of the market in 2020.
But despite low interest rates, the cost of buying a home has increased in recent years. Housing expenditures have also increased – up 2.9 percent in 2019 – according to the Bureau of Labor Statistics. As mortgages get bigger, it’s important to have a plan in place if something happens to you while you’re paying it off.
A term life insurance policy that coincides with your mortgage is the best option for homeowners with outstanding debt.
A life insurance death benefit can be used to pay off a mortgage and isn’t subject to taxes
Mortgage life insurance only covers your mortgage and leaves a gap of protection for your loved ones
Your life insurance policy should cover your salary, dependents, your mortgage amount, and other expenses
Life insurance provides a tax-free death benefit to beneficiaries if you die while the policy is active. Most people with dependents, such as a spouse or child, need life insurance to protect their income and keep loved ones afloat.
But dependents aren’t the only reason to get life insurance. If you have any outstanding debts or loans (such as a mortgage), life insurance ensures your family isn’t stuck with payments they can’t afford. It also prevents them from having to use your estate – which is subject to taxes, probate, and creditors – to pay off the mortgage.
There are several types of life insurance, but we recommend term life insurance for most homeowners’ needs. Term life insurance is not permanent and expires after a set number of years (the term). You can select a term length (typically 10 to 30 years) that matches your mortgage length, so your loved ones are secure.
|TERM LIFE INSURANCE POLICY FEATURES|
|Policy Duration||10-30 years|
|Guaranteed Death Benefit?||Yes|
Methodology: Average cost calculated based on rates for non-smoking males and females between 20 and 40 years old in Ohio, who qualify for a Preferred rate class, obtaining a 20-year, $500,000 term life insurance policy. Life insurance averages are based on a composite of policies offered by 11 carriers that offer policies through the Policygenius marketplace. Individual rates will vary as specific circumstances will affect each customer’s rate. Rate illustration valid as of 1/11/2021.
Policygenius’ experts recommend that you multiply your income by 10-15 times as a starting point for how much life insurance you need. So if your current salary is $50,000, you can estimate that you’ll need $500,000-750,000 in life insurance coverage. However, your coverage should encompass all of your anticipated financial obligations, including your mortgage.
If you have a $200,000 mortgage, your recommended coverage amount in this scenario would increase to $700,000-$950,000.
Outstanding debt won’t disappear when you die, which can leave your family responsible for all or part of it if they co-signed the mortgage. Even if your spouse or partner did not co-sign your mortgage, creditors may use your estate to repay your lender. A life insurance death benefit, on the other hand, cannot be taken by creditors from your beneficiaries if you have outstanding debts when you die.
Mortgage lengths can vary, but most Americans opt for 30-year fixed-rate mortgages. Each year that you delay buying a life insurance policy, the cost of premiums increases by 4.5 - 9% on average. So if you’ve recently bought a home, you should immediately shop for a policy that will outlast your mortgage.
If you’re thinking about buying a home in the next few years, we recommend securing life insurance coverage sooner rather than later to lock in premium rates while you’re younger and likely healthier.
N/A = Policies not available for this age/term/coverage amount
Methodology: Sample premiums are for male and female non-smokers with a Preferred health rating based in Ohio; Life insurance averages are based on a composite of policies offered by Policygenius from AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica and may vary by insurer, term, coverage amount, health class, and state. Not all policies are available in all states. Rate illustration valid as of 2/11/2021.
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Term life insurance is the cheapest and most straightforward option for most homebuyers, but there are other options available.
Mortgage life insurance, also called mortgage protection insurance, pays off your mortgage if you die. Plain and simple. The insurance company pays your lender directly and dependents do not receive a direct payout. For most people, mortgage life insurance doesn’t offer enough security.
Since life insurance is meant to replace your income in addition to debts, your loved ones may struggle if you opt for this type of insurance. Life insurance can cover daily living expenses, childcare, and student loan payments.
Mortgage protection insurance can be a good last-resort option if your age or health makes term life insurance prohibitively expensive or otherwise disqualifies you from coverage. But keep in mind: mortgage protection insurance tends to cost more for less coverage.
There are several variations of permanent life insurance, but the most popular is whole life. Although you’re guaranteed coverage until you die, the disadvantages outweigh the advantages. Permanent life insurance can be 5 to 15 times more expensive than comparable term life insurance policies.
Permanent life insurance can be used to pay off a mortgage, but it doesn’t make sense for most people.
|FEATURES||TERM LIFE INSURANCE||MORTGAGE PROTECTION INSURANCE||PERMANENT LIFE INSURANCE|
|Duration||1 - 30 years||Customizable in 5- or 10-year intervals||Life|
|Cost||$25-35/month||2x more than term||5-15x more than term|
|Guaranteed death benefit||Yes||No; insurer pays lender directly||Yes|
|Guaranteed cash value||No||No||Yes|
|How cash value grows||N/A||N/A||Earns interest at a predetermined fixed rate|
|Premiums||Can increase periodically or stay level for the policy duration||Level, but the value of policy decreases with mortgage||Level|
Since it’s a type of life insurance, mortgage life insurance functions like traditional life insurance and pays out a beneficiary when you die. However, mortgage protection insurance only covers mortgage payments and pays directly to your lender.
If you have outstanding housing debts, term life insurance is preferable to a standalone mortgage protection policy. While both types of policies will repay a mortgage when you die, term life insurance is more affordable and can be used to cover more expenses.
Your term should be at least as long as your mortgage and should account for how long you anticipate having dependents.
Rebecca Shoenthal is a life insurance editor at Policygenius in New York City, specializing in buying life insurance and the ins and outs of life insurance ownership. She's edited business books by the country’s top academics, politicians, journalists, thought leaders and CEOs, including venture capitalist John Doerr’s Measure What Matters, entrepreneur Scott Belsky's The Messy Middle, NYU Stern professor Scott Galloway's The Four, and technologist John Maeda's How to Speak Machine.