A common life insurance need that most
people approach us with is the need to
address a mortgage in the event of a
financial provider passing away.
This is actually a good use of life
coverage that's ideally suited to the
world of term life (as opposed to whole
life). Let's take a look at how
a quick look at your monthly budget.
Where does the money go? There
some things you can cancel (is that
DirecTV NBA Pass really needed?) while
others are core expenses that do not go
away without some pretty significant
changes in lifestyle. The glaring
example of the latter is your mortgage
or rent. The safe assumption is
that a person's mortgage shouldn't
exceed 25% of their gross income.
Needless to say, many people forgot to
heed this advice during the last decade
and the mortgage has crept ever higher
as a percentage of gross income.
When considering your specific
needs for life
insurance, it's important to
understand what exactly a mortgage is.
been sold in the U.S. that a mortgage or
your primary residence is an asset.
The problem is that cash flow only goes
one way with a mortgage outside of home
equity loans which is just additional
debt. A true asset should provide
income or cash flow. Your primary
mortgage does not. So from the
point of view of making ends meet after
a primary provider passes away, the
mortgage is a liability.
It's something to be paid...or you lose
the house and any connotation of
"asset". A secondary or
rental house might be quite different
since rental income should hopefully
provide a net zero in cash outflow.
So how do we address the mortgage
liability with term life insurance?
answer is "very inexpensively". To
some extent, term life is ideally
crafted to address a mortgage from two
angles. You can either take out
the amount of term to match how much
remains on your mortgage or to address
the cumulative amount of payments that
are still to be made against the
mortgage. Mortgages are usually a
responsibility for a certain period of
time with the most common term (hint
hint) being a 30 year mortgage.
Term life can be
purchased to directly meet
this time nature of mortgages or to pay
the mortgage outright. Which is
the best approach?
It depends on your financial situation.
If you use your term life payout to
payoff the mortgage, will you be able to
afford your other monthly financial
responsibilities not to mention college
expenses, etc that occur in addition.
A surviving spouse may have his/her own
income to address a level of expenses
and feel that paying off the mortgage is
the best approach. You really want
to think this through and ideally
discuss your situation with a
possible, our favorite approach is to
purchase enough term life insurance to
provide income (interest, investment,
etc) to address your monthly expenses
including the mortgage. This
really is the true function of term life
insurance...to replace income. If
you spend down your life insurance
benefit quickly such as paying off a
mortgage, you may find yourself in a
financial bind later on from other
needs. There's also the danger
with a lump sum payment of squandering
the money and thus jeopardizing even the
very mortgage that you originally
planned to protect. Worst
case, start with an amount that is
invested to provide income for immediate
financial needs including the mortgage
and re-evaluate after a few years
whether paying more of the mortgage is
the right financial decision.
These are big decision to make after
such a traumatic event so it might be
best to let the dust settle and then
look at the mortgage question.
You can always pay the mortgage at a
later date but it's harder to reverse
course once you have paid off the