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.
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
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/.