Maryland Bar Bulletin
Publications : Bar Bulletin : September 2005

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Mortgage Insurance: Part of a Solid Financial Foundation for Homeowners
By Todd E. Binder

Becoming a homeowner is an exciting event. In most cases your home is your largest single asset and an accumulating asset at that. The purchase of a home is a tremendous positive step within your overall financial plan; it can be a foundation that helps provide financial stability.

However, purchasing a home brings added responsibilities and new challenges. Finding your dream home and arranging the mortgage loan are just part of the home-buying process. You will also want to ensure that there are funds available to help clear the loan or pay the mortgage if an untimely death or disability occurs. Taking the steps to ensure that the proper amounts of life insurance and disability income insurance are in place on each of the homeowners is vital to safeguarding your family’s home.

Life insurance provides you with the peace of mind of knowing that, if you or your spouse should die during the term of the loan, your loved ones will receive a cash lump sum to pay off the mortgage and to help them maintain the lifestyle you would have provided if you were there. Disability income insurance provides that same peace of mind by protecting your single most important assets, which are yourself and your ability to earn an income. Disability income insurance provides an income stream to you if you become disabled due to an injury or illness.

Mortgage Insurance:
Term Life Insurance

Most people have heard the term “mortgage insurance”, but many are not exactly sure what it is or the different types of coverage that could be put in place as mortgage insurance. Mortgage insurance is usually term life insurance. The definition of term life insurance coverage is best explained as “pure protection.” You select a coverage period, the term and a benefit amount. Simply put, if you die while your policy is in effect and all of the required premiums have been paid up to that point, your beneficiaries receive exactly the benefit amount you have selected. No cash values accrue at any time. This means that nothing will be payable to you if you stop paying premiums or if you survive to the end of the plan term, unless, of course, a valid claim is made. It’s simple and practical, and the death benefit payout can help pay off all or a portion of any outstanding loan balance on your home.

Level and Decreasing
Term Insurance

You can structure term life insurance coverage and the length of the term according to your needs. Term life insurance is often considered to be the appropriate coverage for instances where there is a specific period of need such as the number of years left on a home mortgage or business loan. You can put coverage in place for just that specified period of time. The term can be level for one, five, 10, 20 or 30 years, or it can be decreasing. A “level term” policy guarantees you a level premium for a number of years (usually five, ten, 15 or 20) and a level death benefit for the same period. With a “decreasing term” policy, over time, the level of life insurance benefit provided by the plan falls to reflect, for instance, a reduced mortgage loan. And, as the amount of life insurance coverage decreases over time, so does the premium amount paid for the coverage.

Conversion of Term Insurance to Permanent Insurance

One strategy to consider would be to put a level term policy in place which has a conversion privilege up to a certain point in the future. The conversion privilege allows you to convert the term coverage to permanent life insurance coverage at some point in the future without additional medical underwriting. As the name implies, permanent (cash value) life insurance is best suited for the individual with a long-term (often indefinite) need. A permanent policy is really a combination of “pure protection” and a savings or investment element. Premiums are considerably higher than term rates in the beginning years, but may drop significantly, or even disappear, in later years. Other differences may include an increasing death benefit, a “cash value” associated with the policy, and tax-advantaged borrowing privileges against your cash value.

This can be a very effective strategy for individuals entering into the financial arrangement of owning a home for the first time when cash flow may be tight. Individuals typically need a period of time to adjust to their new budget and in many cases things in their monthly budget need to be adjusted to make room for a mortgage payment. Term insurance, again, is initially less expensive than permanent insurance and you can obtain an appropriate amount of life insurance with a relatively small premium outlay. As homeowners become more comfortable with their monthly mortgage payments and cash flow eases, they can build additional savings into their budget by converting a term life policy to permanent or whole life insurance. The permanent life insurance contract can be a viable vehicle to build cash values and provides individuals with the opportunity to save money on a tax-deferred basis.

If you are a new homeowner or are about to become one, take time to ensure that your mortgage obligation will be paid if you or your spouse die or are disabled. If you choose a term life insurance product, consider building in the flexibility of being able to convert it to permanent insurance at a future date. Along with your new home, the appropriate life and disability income insurance will help to provide you with a solid financial foundation.


Todd Binder, MBA, is an associate of FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on the insurance benefits available to MSBA members, visit www.msba.org/departments/membership/baia/.

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Publications : Bar Bulletin: September 2005

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