Your home is so much more than your address. It’s your family’s shelter, where years of cherished memories are made. It’s also likely to be the largest purchase you’ll make in your life. Shortly before or soon after you’ve signed on the dotted line (many, many times), you’ll want to create a plan to help financially protect your loved ones, particularly in the event that one spouse or partner passes away, leaving the other one to shoulder the mortgage payments alone. Life insurance can help provide peace of mind by serving as a financial safety net to help keep you and your family in your home sweet home.
How much life insurance do you need?
At first glance, the answer seems simple: The amount of life insurance you buy should be equal to the amount and length of your mortgage, right? Not quite.
“Ask yourself this question: ‘What do I owe on a monthly basis?’” says Frank Muscat, assistant vice president at Amica Life. “Specifically, if you were gone, and your income wasn’t here anymore to help your family fulfill its obligations, what amount would it take to do that?”
As you calculate the housing portion of those obligations, think beyond your mortgage. According to the U.S. Bureau of Labor Statistics, Americans spent an average of $12,639 on their mortgage payments in 2014.1 However, this figure leaves out several significant home-related expenses – like property taxes and insurance – that are not optional. Also, factor in such costs as homeowners association dues, utilities and maintenance costs. By doing an honest and thorough calculation, you can feel confident and comfortable with the final coverage figure you reach.
“If you were gone, and your income wasn’t here anymore to help your family fulfill its obligations, what amount would it take to do that?” – Frank Muscat, assistant vice president at Amica Life
What type of life insurance best covers my housing needs?
“A term life insurance policy is a perfect match for this need,” Muscat says. Why? A term policy covers you for a specific amount of time, usually from 10 to 30 years. Most mortgage loans range from 10 to 30 years as well. “You can absolutely tie the length of your term policy to the length of the mortgage,” Muscat says. So, if you have a 30-year mortgage, purchase a 30-year term life insurance policy. If you pay off your mortgage early, you can cancel your term policy and consider using that money instead to buy a permanent life insurance policy.
Why is life insurance the best option?
As a homeowner, you might receive offers for “home mortgage protection” or “mortgage life insurance.” If a homeowner passes away, these limited policies may provide a payout only to the mortgage company – not the family.
However, a life insurance policy has a tremendous advantage over these products: flexibility. “Life insurance is tied to you, not your home,” Muscat explains. “So if you buy another house or refinance your mortgage, you still have your life insurance policy.” Because your family members – not the mortgage company – are likely the beneficiary of your life insurance policy, they can decide how best to use the payout to stay in the home that you worked so hard to get or for other family expenses.
“It’s a proud and comforting moment for every family when they get their first home,” Muscat says. “Life insurance ties the bow on that and helps make sure that your family can stay in that home forever.”
1 Homeowners’ Life Insurance Options, NerdWallet, Inc., 2016.
ALIC35318 (exp. 12/19)