When my father and mother were married, they were given some land by my grandparents and built the house in which I grew up with their own hands. My dad passed away many years ago and my mom is getting old. When she passes away, that same house that they built will be sold for tens of thousands of dollars.
Unfortunately, dad suffered from Huntington’s disease. He had to spend the last year of his life in a nursing home. Long Term Care insurance had not been invented at that time so he had to rely on Medicaid to pay his bills. When mom eventually passes, the house will be sold and rather than my sister and I splitting the inheritance, the value of the house and land will go to the State of Indiana through Medicaid’s estate recovery.
If you end up being the one who buys the house in which I grew up, or any other real estate, it is likely that you will need to secure a mortgage. In this post I want to share with you a strategy that you can use to insure your mortgage.
When you “close” on your loan, your lending institution can require you to prove that the loan will be paid off when you die. Often that is done with Credit Life insurance. Credit Life insurance is a type of Decreasing Term Life.
If you purchase Credit Life insurance, the premium you pay each year will remain relatively constant but the benefit reduces along with your mortgage balance. Normally, it is calculated in such a way to only provide enough money to pay off the balance of your loan.
There is nothing inherently wrong with Credit Life insurance. However, because there is minimal health underwriting for Credit Life insurance, premiums tend to be significantly higher than a Life insurance policy that is fully underwritten.
If you are a smoker, in poor health, it may be your best option. If you are not a smoker and in average health for your age, there is probably a better option.
When I started selling Life insurance, back in the 1980s, my portfolio was rather limited. I could sell a Decreasing Term or an Annual Renewable Term.
The Decreasing Term was very similar to Credit Life. The premium remained constant each year but the benefit decreased if you died during that year. When the term of the policy expired, the death benefit was $0.00
The alternative was something called Annual Renewable Term (ART). Although the death benefit remained constant, the premium increased each year. By the time someone was in their late 60s or early 70s, the premium was so high that most people would cancel their policy. The insurance company was able to secure that money from the insured each year. When the insured died, the insurance company did not have to pay any death benefit since they had been forced to cancel their policy.
If you wanted an insurance policy where both your premium and benefit would be guaranteed to remain level for your entire life, you were stuck with the more expensive Whole Life insurance.
In the past couple of decades the insurance industry has developed a cross between Annual Renewable Term and Whole Life insurance. Many of today’s term insurance policies will allow you to “lock-in” your premiums for 10, 20 or even 30 years.
You can have the benefit of a level premium for the length of your loan. Since the death benefit does not decrease over time, if you secure one of these term policies for the length of your loan, you do not have to rely on expensive Credit Life.
If you buy a 30 Year Term for the same amount as your mortgage and are hit by a bus a month later, your heirs will have enough to pay off your mortgage.
However, if you are careful crossing the streets but have a lapse in concentration and are hit by a bus 15 years later, there is no (financial problem.) Your heirs will get enough money to pay off your mortgage with enough left over to pay off your medical bills from the bus accident.
If you prefer to have your life insurance death benefit reduced as the amount of your mortgage reduces, that can be arranged in many cases. As long as you do not reduce your Life insurance benefit below your insurance companies minimum benefit, all you should need to do is contact your insurance company and find out what they require to reduce your face amount.
Since the policy premium is “locked-in,” if you elect to reduce your benefits, there should be a corresponding reduction in your premium.
Be advised that if you elect to do this, each insurance company has different procedures. One insurance company may require you to complete a special “amendment” form. Another insurance company may only require you to mail them a letter with your signature. You should contact your insurance company to see what they require.
If you are not already working with an insurance professional, I would like to help you secure the term insurance you need if I can. Learn more about me on the ABOUT page of this blog.