Buying your first home is a huge step, with your home becoming the focal point of many great memories you’ll build, but also being a long-term financial commitment. For many households, two incomes are required to meet all the monthly expenses. If one income-earner passes unexpectedly, the family can find themselves in a difficult financial position where paying the mortgage and other expenses simply doesn’t fit a one-income budget. Without life insurance, options can be limited and may even force a sale of the home – or worse – lead to a foreclosure.
If there are two income earners in the household, ideally, both should have life insurance policies, particularly if you’ve made large financial commitments such as buying a house (or having kids). Several types of life insurance products can meet your basic coverage needs, but some may have limitations and others can be prohibitively expensive. Whole life insurance, for example, can provide coverage that never expires – but at a significant cost. Premiums for whole life insurance can cost several times the amount for a term life policy with the same dollar amount of coverage. For many new homeowners, the affordable choices are Mortgage Life Insurance or Term Life Insurance.
Mortgage Life Insurance
As its name suggests, Mortgage Life Insurance is designed around your mortgage debt. The policy payout, called a death benefit, is often payable to your mortgage company for the outstanding balance of the mortgage if you die while the policy is in force. With the mortgage company often named as the beneficiary and a coverage amount that goes down as your mortgage balance goes down, Mortgage Life Insurance is really coverage protecting the lender as opposed to a policy that adequately provides for your family’s future. It’s common for lenders to offer this coverage as part of a mortgage package.
Term Life Insurance
A Term Life Insurance Policy provides more freedom than a Mortgage Life Insurance policy because you can choose the beneficiary, the amount of coverage, and the length of the policy, allowing you to customize your policy to your family’s specific needs. The mortgage is only one expense in your household, particularly if you have children. Auto loans, credit card balances, food, schooling costs, utilities, and other ongoing expenses don’t go away if the mortgage is paid off and these other expenses can easily add up to more money paid out monthly than the mortgage itself.
A term life policy gives you the option to choose higher coverage amounts when needed to cover other household expenses and to help ensure a more comfortable lifestyle for your family. For example, if your mortgage amount is $300,000 and you want to add $200,000 in additional coverage to provide for life’s necessities, you can easily choose a higher amount of coverage. This ensures there is enough to pay off the mortgage, and as the mortgage balance is paid down, provides even more money for life’s expenses. You might choose a 30-year term policy for a 30-year mortgage or a 20-year policy if you choose a shorter mortgage length, like a 15-year mortgage.
Tips For Getting Started
- Don’t procrastinate: Life insurance is one type of insurance that becomes more expensive to buy as you get older. Rates have come down in recent years as medical science advances and health awareness improves but if another birthday goes by, your rates will climb higher. Lock in your rate now.
- Consider all your expenses. Add up your recurring expenses by category. You might be surprised to see where your money goes. You’re also likely to find that the mortgage is only one consideration when choosing a coverage amount.
- Choose a term that meets your family’s needs. Even if you choose a 15-year mortgage, consider buying a longer term to provide for your family through all or most of the years you expect to generate income. Life insurance has many uses, but in its simplest form, a well-structured life insurance policy is income replacement.
A term life insurance policy typically offers the best value for many households because you can choose the coverage amount, select your beneficiaries, and choose a term that’s customized to the length of your financial commitments.