How Life Insurance Can Protect Your Mortgage
5 ways to use life insurance to pay off a mortgage
Life insurance and mortgage protection go hand in hand. Let's look at five scenarios where a life insurance policy can help relieve the financial stress of having a mortgage balance.
1. Helps your family pay off the mortgage balance
Many people use term life insurance as mortgage protection by getting a large enough policy to pay off the entire mortgage balance. If you pass away during the coverage period, life insurance can help keep your family from having to sell the house and move during an already emotional time. Regardless of income, if your spouse is a co-borrower or co-signer on the loan, they're responsible for taking over the payments. So, when calculating the right coverage amount, use your mortgage balance as a starting point.
2. Leaves enough for your family to make monthly home loan payments
A life insurance policy gives your family options. While many policyholders give their beneficiaries the ability to pay off the mortgage in full, the beneficiaries don't necessarily have to. Instead of using life insurance to pay off a mortgage upon your death, the beneficiary could keep the cash as a financial cushion and affordably continue to make monthly mortgage payments. That allows them the flexibility to invest the funds, start a new business venture, or go back to school. The goal is to remove this financial burden from your loved ones.
3. Avoids triggering problems from a due-on-sale clause
If you're the only owner on the real estate deed, then your death may trigger a due-on-sale clause for your beneficiary. They usually can't just assume your mortgage and would have to refinance the loan in their own name. That could be problematic if your beneficiary doesn't meet the credit or income requirements.
Plus, a beneficiary typically won't be able to refinance the loan until the estate goes through the probate process, which can take months. That means they'll have to keep up with the mortgage payments in the interim. Here's where life insurance comes into play. Disbursement of funds gets handled outside the courts, and your beneficiary can quickly file a claim and receive their benefit to stay current on the home loan.
4. Relieves a stay-at-home spouse from finding a job right away
It's crucial to have a solid life insurance policy when you're the sole breadwinner with a stay-at-home spouse. Besides providing enough coverage to pay off the mortgage, consider including a multiple of your salary, at least a few years' worth. That gives your spouse time to reenter the workforce slowly. It also helps them figure out their childcare situation. For instance, if you have young children, consider enough coverage to protect the family until the kids reach school age.
5. Lowers your spouse's cost of living during retirement
Both term and whole life insurance can help protect your mortgage when you and your spouse are nearing or already at the retirement stage. Assuming you both collect social security, your surviving spouse likely won't continue to receive your benefit (but there are specific exceptions). The protection of life insurance ensures they can cope with current expenses and rising expenses as they get older and inflation increases.
Ethos has a handy online life insurance calculator that helps you determine what type of coverage you may qualify for. It's important to compare policies and get term and whole life insurance quotes to determine which option best protects your family from mortgage and other debt.
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