Consider Life Insurance When Buying a Home
Would your family be able to remain in your home if a breadwinner passed away?
Your home is so much more than your address. It’s your family’s shelter, where years of cherished memories are made. Shortly before or soon after you’ve signed on the dotted line (many, many times), you’ll want to create a plan to help financially protect your loved ones in the event that one spouse or partner passes away, leaving the other one to shoulder the mortgage payments alone.
Why do homeowners need life insurance?
Your home is likely to be the largest purchase you’ll make in your life. You probably have homeowners insurance to protect your home if something happened to it. Life insurance can help your loved ones stay in their home by providing funds to pay the mortgage after you’re gone.
How much life insurance do homeowners need?
At first glance, the answer seems simple: The amount of life insurance you buy should be equal to the amount and length of your mortgage, right? Not quite.
“Ask yourself this question: ‘What do I owe on a monthly basis?’” says Todd Oster, Assistant Vice President at Amica Life. “Specifically, if you were gone, and your income wasn’t here anymore to help your family fulfill its obligations, what amount would it take to do that?”
As you calculate the housing portion of those obligations, think beyond your mortgage. The average mortgage payment is $2,064 on a 30-year fixed mortgage.1 That adds up to $24,768 over a year. However, this figure leaves out several significant home-related expenses – like property taxes and insurance – that are also necessary in owning a home. You should also factor in such costs as homeowners association dues, utilities and maintenance. By doing an honest and thorough calculation, you can feel confident and comfortable with the final coverage figure you reach.
Why you should evaluate your existing life insurance coverage amount when you buy a new home.
You may already have a life insurance policy in place as you purchase a new home. Perhaps you got this policy when you didn’t have any dependents or loans. Adding a mortgage to the amount of your liabilities can increase the amount of life insurance you may need. Not only could the amount of needed coverage change, but how long you need it for could also be impacted. If you have a 20-year term life policy but just got a 30-year mortgage, it could be in your best interest to make sure you secure coverage for the full life of your mortgage. Having adequate coverage in place means less to worry about for you and those you care for.
What are the different types of life insurance for homeowners?
There’s no specific life insurance type for homeowners. Most existing life insurance options can work well, depending on your overall needs. The most basic policy types are term life insurance and whole life insurance. A term life insurance policy has a level premium for a specific period, such as 10, 20 or 30 years. Your coverage ends once the specified term is complete, and therefore, a payout only happens if the insured’s death occurs during that term.
Whole life insurance, or permanent life, provides coverage for the insured person’s lifetime as long as premium payments are in good standing. These policies build cash value, which a policyholder can access under certain conditions.
For homeowners looking to specifically provide funds for their family to remain in their home, “A term life insurance policy is a perfect match for this need,” Oster says. Why? A term policy covers you for a specific amount of time, usually from 10 to 30 years. Most mortgage loans range from 10 to 30 years as well. “You can absolutely tie the length of your term policy to the length of the mortgage,” Oster says. So, if you have a 30-year mortgage, purchase a 30-year term life insurance policy. If you pay off your mortgage early, you can cancel your term policy and consider using the term premium funds instead to buy a permanent life insurance policy.
What’s the difference between life insurance and mortgage protection insurance?
Mortgage protection insurance, or MPI, pays off your remaining mortgage if you were to die.2 MPI pays the death benefit to your mortgage lender, compared to life insurance, which makes death benefit payments to your selected beneficiaries. This makes MPI a much more limited option than traditional life insurance. MPI is not to be confused with PMI (private mortgage insurance), which may be required by your lender if you make a down payment of 20% or less.2
Do you need both life insurance and mortgage protection insurance?
You may not need both life insurance and mortgage protection insurance, depending on the amount of life insurance you have. If you have a life insurance policy and a mortgage, should you pass, your life insurance policy will provide funds to your dependents so they can continue to make mortgage payments. Life insurance will also allow your dependents to keep up with various other expenses such as homeowners insurance, property taxes, utilities and many more bills, whether they’re home-related or not. To summarize, life insurance can help your family stay in your home while also covering other expenses, whereas mortgage protection insurance will only eliminate the remaining mortgage payments.
Why is life insurance the best option?
A life insurance policy has a tremendous advantage over other mortgage protection products: flexibility. “Life insurance is tied to you, not your home,” Oster explains. “So if you buy another house or refinance your mortgage, you still have your life insurance policy.” Because your family members – not the mortgage company – are likely the beneficiaries of your life insurance policy, they can decide how best to use the payout to stay in the home that you worked so hard to get, or for other family expenses.
“It’s a proud and comforting moment for every family when they get their first home,” Oster says. “Life insurance ties the bow on that and helps make sure that your family can stay in that home forever.”
Want to learn more about Amica life insurance?
1 The average monthly mortgage payment by state, city, and year, Business Insider, 2022.
2 What is mortgage protection insurance (MPI)?, Policygenius, 2022.