Find Protection in Life Insurance for Homeowners

Becoming a homeowner is a huge financial milestone. Saving for a down payment, getting a mortgage and successfully making an offer all require major discipline. That’s why you deserve to pop the champagne and throw yourself a housewarming party.

But if you’ve recently purchased a home, now is a good time to consider putting one more task on your to-do list: Protect your investment by reassessing your life insurance needs.

Because buying a home typically represents a huge financial obligation, it’s commonly recommended that homeowners purchase at least enough life insurance coverage to pay off your mortgage. Doing so can protect your family from having to move if you die while still owing money on your home.

The National Association of Realtors (NAR) reports that about 4 out of 5 people buying a primary residence finance their homes ^[0]

If you’ve recently gotten a mortgage for a home, life insurance can help you avoid leaving behind a large loan for others to manage. You may want to buy a policy or increase your coverage amount in the following circumstances:

• Your family would struggle to make mortgage payments without your income. 

• You co-own your home with your partner or spouse, or someone else co-signed your mortgage, and you don’t want them to shoulder full responsibility for mortgage payments.

• You want your loved ones to inherit your home, but your estate doesn’t have enough money to pay off the mortgage.

There are several types of life insurance you can choose from to protect your investment after buying a home. Here are some common examples:

Term life insurance is a policy where you pay premiums over a fixed amount of time, known as the term. Typical terms are 10 years, 15 years, 20 years or 30 years. If you die during the policy’s term, your survivors receive your life insurance death benefit. But if you outlive the term, the policy expires and your loved ones don’t receive a benefit.

Most term life insurance has a death benefit that stays the same until the policy expires, but with decreasing term life insurance, the death benefit gradually gets smaller over time. Decreasing term life insurance may have lower premiums than level death benefit term life insurance.

Keep in mind that because the premium stays the same even as the benefit shrinks, over time you’ll pay the same amount for less protection. Still, decreasing term life policies could make sense if you need a lower payment or your financial obligations will decrease as you pay down your mortgage.

Mortgage life insurance, or mortgage protection insurance, is a term life insurance policy that pays off your mortgage balance if you die while the policy is in force. The beneficiary is your lender, not your survivors. That means your loved ones won’t receive a payout that they can use toward other debts, day-to-day living costs or your final expenses.

Unlike with many life insurance policies, you can usually get approved for mortgage life insurance even if you have major health issues, but you’ll pay more than you would for a comparable amount of term insurance. If you’re healthy, term life insurance is usually a better buy.

First-to-die life policies insure two people’s lives, i.e., two spouses or individuals in a domestic partnership, but it only pays a death benefit once, after the first person dies. Though these policies are somewhat rare, they can provide security when two people earn income and are jointly responsible for a mortgage or another large debt.

A permanent life insurance policy is an option if you expect to have significant financial obligations even after you’ve paid off your mortgage. Permanent life insurance policies are designed to last into advanced age, with top age limits anywhere from 95 years to 120 years. In addition to a death benefit, they also include a savings component called cash value, which you can withdraw or borrow from while you’re still alive.

The process of buying life insurance will vary based on the type of policy you’re buying.

You may be able to get mortgage protection insurance through your lender or through an insurance company. These policies usually have guaranteed acceptance, meaning the insurance company will approve you as long as you meet the age requirement. Premiums will be more expensive because there’s no underwriting, so the insurance company doesn’t consider your health history or require a medical exam.

You can typically shop for term insurance online, or you can work with an insurance agent. But if you’re buying permanent life insurance, you’ll typically need to get quotes through an agent. To obtain enough coverage to pay off your mortgage, you’ll probably need to undergo life insurance underwriting, which may include questions about your health, a medical exam, lifestyle, and a review of third-party records, like your prescription drug and driving history.

If you have dependents, a co-owner or a co-signer, consider buying at least enough life insurance to pay off your mortgage. But that’s just a minimum. You may want to purchase enough coverage to pay off any other household debts, along with your final expenses. If you have young children, it’s important to consider future needs, like education costs.

Ideally, your life insurance policy should last until your mortgage will be paid off. For example, if you recently took out a 15-year mortgage, the length of life insurance coverage should be at least 15 years.

Some people use an approach called life insurance laddering. With this strategy, you have more than one life insurance policy, each with a different term to provide more coverage for periods of your life when your financial obligations are greatest.

For instance, if you have a 15-year mortgage and young children, you could take out a 15-year term policy and a 30-year term policy, each with a $500,000 death benefit. If you outlive the 15-year policy, you may have fewer financial responsibilities because, presumably, your mortgage will be paid off. But you’ll still have coverage in place for another 15 years that can help pay for things like final expenses and your children’s educations should you pass while the 30-year policy is in force. This strategy also reduces your overall premiums.