Whether you’re purchasing a new home or refinancing one, you’ve probably broken out a calculator more than a few times. And if you’re basing your numbers on your current income, everything may seem to check out. Sure, your salary can take care of the mortgage, but what if you were to unexpectedly pass away and your income was lost? That’s where life insurance comes in.
As it turns out, almost half of U.S. households don’t have enough life insurance.1 To ensure that you aren’t coming up short, you’ll want to make certain that your remaining mortgage payments are covered.
1. Mortgage term = life insurance term
If you don’t already have life insurance, an easy way to start is by looking into a term life policy. A simple strategy is to choose a policy whose duration and dollar amount equals that of your mortgage. For example, if you’re paying off a $200,000 home loan over 30 years, you can buy a 30-year term life policy with coverage at the same amount.
2. Total life insurance coverage amount > mortgage amount
If you already have life insurance, you should verify that it is sufficient in light of your debt. Take the amount of your home loan and subtract the value of your life insurance policy. If the result is a positive number, you need additional insurance. Moreover, it’s important to remember that your total life insurance should be at least enough to cover your mortgage, but ideally it should help cover your other financial obligations as well.
3. Mortgage life insurance ≠ life insurance
You may be thinking, “Why should I change my overall life insurance strategy when there’s mortgage life insurance offered with my loan?” Here’s a quick breakdown of how life insurance can serve the same purpose and be more desirable:
- Usually, you purchase mortgage life insurance (also called mortgage protection insurance) from the same financial institution that provided your mortgage. While the policy’s rules may sound convenient, the payout would go directly to your lender rather than the beneficiaries you may want to appoint, such as your partner or children. Life insurance offers more flexibility.
- Mortgage life insurance premiums are included with your mortgage, which means that you will be paying interest or finance charges on top of the mortgage life insurance premium. Term life insurance premiums don’t include these charges.
- Mortgage life insurance may also stay with the mortgage – so, if you move and get a different mortgage, your coverage will end. Life insurance from a life insurance company is yours regardless of where you live or who your mortgage is with.
- If you’re a nonsmoker, you can usually also beat the price of mortgage life insurance by as much as 50 percent2 by shopping for life insurance instead.
1 Life Insurance Ownership in Focus (2016), LIMRA, 2016.
2 Do I Need to Buy Mortgage Life Insurance?, Bankrate, 2013.
ALIC35218 (exp. 12/19)