Financial health and growth is all about acquiring more assets. For a majority of people around the world, the most important asset they have is their home. Thanks to mortgage rates hitting historic low after historic low, millions of Americans have been encouraged to buy a new home this year. Not only does owning a house give your family a place to call a home, it can also help build intergenerational wealth. However, what happens if something happens to you? Who is going to take care of the mortgage? Will your family be able to keep their home if you are no longer in the picture? Getting a mortgage and buying your home only helps your family if you make sure it is protected during your lifetime and beyond. That’s why it’s important to think about how insurance can help you and your family keep your home when tragedy strikes. 

The Relationship Between Mortgages and Insurance 

Insurance and mortgages go hand-in-hand. When you apply for a mortgage there is a reason why your lender takes a look at your income to help determine if you qualify. Loan underwriters want to make sure that you have the income to afford your mortgage for the life of the loan. They do not want to approve a mortgage if it is not likely that you will be able to afford the payments. 

If 2020 has taught us anything it is that we cannot take job security for granted. Over 70 million Americans have had to file for unemployment benefits since the beginning of this year because of the pandemic. Nobody expected this to happen. But, aside from global pandemics that disrupt most aspects of our lives, there are many other unforeseen events that need to be planned for. What happens to your income and your mortgage if you become injured? What happens if you become disabled? Even worse, what happens if you die? 

To protect your mortgage and your home there are a few different insurance options that can ensure your family can keep your home. Two types of insurance that can be used to safeguard your mortgage are mortgage protection insurance and term life insurance. 

Mortgage Protection Insurance and Mortgages

What is mortgage protection insurance? It is a simple concept. If you die, then your insurance policy pays off your mortgage. There are a variety of different mortgage protection insurance policies that provide a variety of possible coverages. For instance, some policies also pay out in the event of significant injury or disability. Furthermore, some mortgage protection insurance policies only pay off your loan if everyone on the loan passes away. This is important if you file a joint application for your home loan or you have a cosigner. In these scenarios your policy will only pay off your loan if all signers pass away. In the event that your policy only covers the death of all parties, then you need to plan accordingly. If you require multiple income streams to maintain payments of your mortgage, then you need additional levels of protection. 

It is also important to keep in mind that mortgage protection insurance is not paid out to you. It is paid out to your lender. This means that you have no flexibility in terms of how the insurance money is used. Additionally, the amount you get from mortgage protection upon your death decreases over the life of the policy. This type of policy only covers the remaining balance of your mortgage. So, as your loan gets paid off and your balance declines, so does the amount of coverage. 

Term Life Insurance and Mortgages

Many people are familiar with term life insurance, which is sometimes referred to as pure life insurance. Essentially, term life insurance provides a specific death benefit for a specific term or coverage period. Term life insurance policies are one of the most common types of life insurance policies are one of the most cost effective. But, what do they have to do with mortgages? 

Term life insurance is another way to protect your home in the event that you or another key income earner passes away. What many homeowners do is get a term life insurance policy for the amount of the mortgage for the length of the mortgage. If you have multiple income earners in the household, then it is important to get a term life insurance policy for both of them. This way, if any of the income earners on the mortgage pass away before your house is paid off, then the death benefit can be used to pay off the loan. 

Using term life insurance to cover your home loan in the event of a death is different than using mortgage protection insurance. First, the death benefit for term life insurance is paid to you and not your lender. You get to decide what you want to do with the money. It is possible that you might be able to maintain mortgage payments, but could use the money for something else. With term life insurance you have the flexibility to choose where the money goes. That’s not true of mortgage protection insurance. 

The other big difference is that the amount of money you get at the end of the term does not decrease with your mortgage balance. If a tragic death were to occur after you have paid off a lot of your loan balance, then your death benefit would be the same as if you had paid none. Again, this gives you more flexibility. It gives you the option of using the death benefit to pay the rest of your mortgage and have money left over for other needs. 

Final Thoughts

Mortgage protection insurance and term life insurance are two different ways of protecting your home in the event of an untimely death. There are a few things to keep in mind if you are considering either of these options. First, make sure you speak to a licensed insurance professional. This article is meant to give you some of the basic concepts and is not meant as insurance advice. Always trust licensed professionals who are experts in their fields. Second, choosing between mortgage protection insurance and term life insurance is not necessarily an either/or choice. There is a world where you can have both. Finally, every individual and family’s financial situation is different. Make sure you make choices based on your finances and your needs. 

Owning a home is a blessing. You do not even need to own it outright in order to get many of the benefits. Remember, even if your home is not paid off and you have a mortgage, as long as you are building equity it is still an asset. As such, it is important to do everything in your power to protect that asset and make sure it can be passed to future generations. If you are interested in buying a home of your own, contact us! The team at Peoples Choice Mortgage can give you a complimentary mortgage qualification assessment to see how close you are to owning a home.