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Sometimes it can get confusing when it comes to all of the details that are involved in obtaining a mortgage. Yes, it is required in most cases to have insurance when applying for a mortgage, but it is not life insurance.
Property insurance and fire insurance are usually required at some point along the process to protect the lender, but life insurance is an option.
Life insurance is a good option because that will protect the family members of the person or persons who owe the money.
If the borrower dies, then money will be made available to pay off the mortgage obligation or make the payments. In most cases, if there were to be no life insurance coverage and the borrower dies, then the family would lose the house back to the lender.
Learn more about life insurance and mortgages below and make sure to use our free comparison tool above!
What is a Mortgage?
A mortgage is a legal contract that sets forth the agreement between the lender and the borrower when the purchase of a home or business is financed over a period of years.
In the agreement, the lender agrees to allow the borrower to make payments, usually for from 15 to 30 years in exchange for using the property as collateral.
Using the property as collateral means that if the borrower defaults on the payments, the property reverts to the lender. The mortgage payment consists of principal, interest, taxes and insurance.
Taxes are local taxes and insurance consists of property and fire insurance. Typically, the borrower will put forth a down payment of up to 20 percent unless the loan is an FHA loan, where the down payment is much less.
An FHA loan charges the borrower a small insurance charge that goes to pay the loan if a buyer defaults. The down payment can range from nothing to about 3.5 percent.
Why Life Insurance
Mortgage life insurance is used to provide a way of making the mortgage loan free and clear if the breadwinner or breadwinners, as the case may be, dies prematurely.
There are several forms of mortgage life insurance, and they all serve the purpose of providing the needed protection.
–The Lender Can Provide Mortgage Life Insurance
Lenders can sometimes offer a form of group term mortgage life insurance. In the event of the death of the borrower, the policy will repay the lender the current amount of the lender.
Lenders have a plan available called MPPI which offers coverage for death, disability or loss of a job.
This coverage is offered as a declining death benefit coverage based on the amount owed from year to year, and the payment is included in the borrower’s mortgage payment.
If the borrower dies, the balance of the mortgage is paid to the lender and the family of the borrower owns the house free and clear with no more payments due. If the borrower loses his or her job, a benefit is paid for a limited time.
If the borrower is disabled, a payment is made for a limited time.
–You Can Purchase Your Own Term Life Insurance to Cover Your Mortgage
If you are in reasonably good health you can buy your term life insurance to cover your mortgage.
You have the choice of naming the lending institution as the beneficiary, or you could name your spouse or another responsible party.
By naming the person who will be responsible for paying the mortgage, the death proceeds will go directly to them, and they could then make a choice between paying off the mortgage in full, partially, and make payments if they so wish.
–You Can Use Permanent Life Insurance
You can buy a permanent life insurance policy and use the cash values that accrue inside of the policy and pay the mortgage off seven to ten years early. This will save quite a good sum of money.
Just take an amortization schedule from your mortgage company and plot the projected cash value of your permanent life policy, and you will have the approximate time that the payoff will occur.
The policy can be a whole life policy, universal life, equity-indexed universal life, or an endowment policy.
Any policy that accumulates cash values, dividends, or interest will work well. The funds necessary to pay off the mortgage balance early will accumulate automatically as the premiums are paid on the policy.
–There are Advantages to Buying Your Own Mortgage Protection
When you buy your own mortgage protection life insurance you do have the advantage of owning the policy yourself. With some lender-sponsored plans, the insurance can run out before the mortgage does.
Some lender-based plans stop at age 65, which is very arbitrary if your mortgage runs until you are 64.
If you buy your own term policy, you can gear the length of the coverage to match the years of your mortgage. You can convert the term insurance into a permanent policy if you wish, either for the entire amount or a partial sum.
You can name your spouse or another responsible person as beneficiary instead of the lender, which makes the whole plan much more flexible as to how the money is received.
Owning your own life insurance has distinct advantages because you own and control the policy. That means that you can do what you want with it.
Unless your health is bad, and you need to go through a lender because there are no health requirements to obtain mortgage coverage, it is usually better to secure your own coverage through a qualified life insurance broker.
Work Through a Life Insurance Broker
Shop around for a broker who knows the ropes of what companies, plans, and qualifications are required to get you the best plan for your circumstances.
A broker will have access to more than one company, and that works to your advantage.
You could spend days sifting through all of the quotes that pop up online and still be no closer to a solution simply due to the maze of information that is available.
A good broker will be able to get right to the heart of the matter. If you do have any health issues, then the broker will know where to go to get you the best rate.
He or she will know what companies will work the best in all situations and they will help you get commitments, so you will know where you stand before you have to spend any money.
While buying a life insurance policy to protect your beneficiary if you should die is a good idea, it is not required.
However, without adequate coverage, your beneficiary could end up losing the house if he or she could not make the payments.
Consider all of your options by hiring a good life insurance broker and get the best program that is available for you.
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