How Life Insurance Can Cover Your Mortgage Balance

If you're like most Americans, your biggest investment is in a house. Sometimes that investment can be so big, it's difficult to think about losing it all. Life insurance could be the solution if someone were to pass away suddenly and leave family with the mortgage balance.

In this post, we will cover what life insurance can do for your loved ones and how that coverage could help them out in an expensive situation. We'll also talk about other factors you'll want to consider when purchasing life insurance for retirement planning purposes or estate-planning reasons.

Life Insurance Can Cover the Mortgage Balance

The first thing to understand is that there are different types of life insurance. There's term life, whole life and variable universal life. Term provides just as it sounds: term. You can get term for 20 or 30 years if you choose and pay a premium every month or every six months for that length of time. When the term ends, so does the policy unless you renew it. Whole (or permanent) insurance gives you the option to pay premiums over your lifetime in exchange for coverage until you pass away ("whole" means the policy is good even after death). Variable universal life works similarly to whole but adds investment options as well - more on this below.

When you're considering life insurance, you'll want to think about how long you want the policy and your age when you take out the policy. Let's say for example that you wanted 20 years of coverage. You might buy a term policy for one premium payment of $1,200. At that point, if everything goes well and you don't have any accidents or health problems, your family could be covered for a long period of time. Of course, if something does happen to you before 20 years pass - whether it's an accident or some type of medical issue - then your family won't receive payment from the term life insurance policy.

That's where permanent (or whole) life insurance can come in handy. If you have a permanent insurance policy, you can keep it for your whole life. In other words, the policy covers you if something happens even after 20 years. That way the coverage is guaranteed to last until you pass away (or until the age where it would no longer be affordable based on current insurance rates).

Permanent life insurance might be exactly what you need to make sure your family is covered for your mortgage balance should something happen to you. But there are other things to consider as well that I'll go over below.

Other Considerations - How Life Insurance Works with Other Investments

If you're wondering about how buying a life insurance policy works with other investments, then rest assured that there aren't too many limitations. You can invest in life insurance policies and get the tax advantages of a taxable investment.

Having a permanent life insurance policy is just one way you could use your life insurance to help make your other investment decisions. Maybe you've heard about using life insurance to help cover student loan debt or credit card debt. If that's something you're considering, I would recommend reading this article from our MoneySmart blog on how to use life insurance to pay off student loans. You may also want to talk with a financial advisor who specializes in retirement planning, estate planning or both.

Before deciding whether buying a term or permanent policy is right for you, consider if it's really necessary given your current goals and needs. If you have decades to go before the mortgage balance is due, a term policy might be fine for paying that balance off. But if you're looking to retire or are hoping to start lending money at some point, a permanent policy could be better for long-term payment goals.

How Life Insurance Could Help with Your Mortgage Balance

If the thought of life insurance helping your family with an expensive mortgage balance sounds interesting, it's certainly a good one. What if something happened and your family had no way of paying off the mortgage? If life insurance can help cover that balance, then so much the better.

If you know without a doubt that you want permanent life insurance, I think the most important thing to consider is whether or not it's affordable. If you're already spending a considerable amount on your mortgage payment, would adding another $200 or $300 per month be something you could afford? A lot of people might not think that number is too bad for peace of mind - but others may decide they'd rather spend the money on their mortgage instead.

In addition to considering affordability, there might be other factors that would make permanent life insurance more appealing. For example, some people use life insurance as an estate-planning tool. This is where the idea of living insurance comes in. By having a permanent life insurance policy, you could use it to ensure that money keeps rolling out even after you pass away. For example, if you have $1,000,000 worth of coverage and die with $750,000 left on the mortgage (using a 20-year term plan), then your family will receive that amount to help pay off the balance. That is if they don't have other assets they can tap into to cover it instead. But unless your spouse works or has savings that make up for your income not being there anymore, chances are they won't be able to use those assets in combination with the money from the policy.

When you're considering life insurance and mortgage, it's important to know what type of policy is best for you. For example, a permanent life insurance policy might be good for ensuring your family remains covered after you pass away. Should something happen to you now, they'll still be able to pay the mortgage off.

The four types of life insurance are explained in more detail below:

Term Life Insurance - The Basics:

Term life insurance can provide term or permanent coverage that lasts anywhere from years to decades. The premiums are charged monthly, quarterly or annually based on these parameters and how long you want coverage (20-30 years is fine). For example, let's say you want 30-year coverage. You can purchase the policy for $600 per month. The premium works out to be about 8% of your income. The coverage lasts for as long as you want it to, until you die (or pass away).

Once you purchase the policy, the company will pay your bills and have a contingent beneficiary in place in case of your passing. If that happens, then the beneficiary receives a monthly payment for as long as necessary until they've paid off all of that debt. The idea is to give your family some money when they need it most - not when they want it most (e.g., take out a mortgage or other loan).

Conclusion: Term life insurance is the simplest of life insurance policies. The coverage is guaranteed to last for a predetermined amount of years, and you'll have to pay the premium every month until then.

Permanent Life Insurance - The Basics:

Permanent life insurance can be purchased for amounts that last until your death or cash-in value. This means that if you die before the policy ends, the money will be paid out to whomever is designated as a beneficiary. That way your family doesn't run into any trouble paying off your mortgage if something happens to you before it's paid off. If they don't need all of that coverage, then they can keep it until it runs out (assuming their cash-in value has decreased).