When people contact me looking for life insurance coverage, they frequently express interest in getting life insurance to cover a mortgage. I often hear comments such as, “I have a $500,000 mortgage, so I just want a policy with a $500,000 face value so my wife can pay off the mortgage if I die.”
While I am a fan of protecting your family with any amount of life insurance, I’m not a fan of this approach to calculating how much the face value should be.
$500,000 may not be enough for some families, but then in some cases, you might be able to get by with much less.
Option 1 – Complete Coverage
My ideal plan for my clients has nothing to do with paying off their mortgage.
Instead, what they need is enough insurance to replace their income for as long as they plan to work.
For example, let’s say you make $60,000 per year and plan to retire in 20 years. My income replacement calculator says that if you were to die, your spouse would need approximately $740,000, which would pay your spouse 80% of your income for 20 years. This way he/she can continue to pay all the bills (not just the mortgage), should something happen to you. (For a quick method to calculate how much life insurance you need, click here.)
While having a policy worth a $740,000 may provide fantastic coverage for your family, and it’s certainly more life insurance than 90% of Americans have, it may be unaffordable. Don’t panic. Your family may be able to get by with less.
Option 2 – A Cheaper Plan
Let’s assume your mortgage payment is $2,500 per month. All you would need for your life insurance policy to cover a mortgage payment of $2,500 is a face value of $350,000. This strategy assumes that upon your death, your spouse invests the death benefit proceeds, which will earn a conservative 6%, and draw off of that money to pay down the mortgage over time, rather than apply the entire $350,000 to the mortgage balance immediately upon your death. This plan would provide enough money to cover the mortgage payment for over 20 years.
There are two advantages to this strategy.
1 – It’s cheaper
2 – Twenty years down the line, the mortgage balance will be significantly lower, while the value of your home should have increased significantly.
At that time, your spouse would have many options, including refinancing the mortgage to get cash out or lower the payments, or sell the house and use the equity from it to purchase a smaller one. The point is, if you can’t afford option 1, option 2 still buys your spouse time and gives them plenty of options down the line. (For an explanation of the different types of life insurance, click here.)
Questions and Answers
Here are some questions I often get regarding life insurance and mortgages:
What type of life insurance is used to cover a mortgage?
If your only consideration for purchasing life insurance is covering your mortgage, then term life insurance should do the trick. If you have a 20 year mortgage, then a 20 year term policy would cover this aptly. This is good news to many since term life insurance tends to be much more affordable than whole life.
Can I get a mortgage without life insurance?
Yes, technically you could. But I don’t recommend it. The purpose of life insurance is to provide for your loved ones in the untimely event of your death. What could be more important than ensuring that they can keep a roof over their heads?
How much does mortgage life insurance cost?
There are several factors that influence the cost of premiums, including your age, health, and how long you need coverage. Feel free to give us a call at 877-443-9467 if you would like an accurate quote for your specific situation.
Getting Started with Life Insurance
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Use the Instant Quote box on the right hand side of this page to get life insurance quotes to cover your mortgage, or give us a call at 877-443-9467.