Because I’ve shared all the details of our mortgage and our mortgage payoff plan, I get a lot of questions about mortgages. One of those questions is less common but still important: do I need life insurance for a mortgage?
What Is Life Insurance?
Life insurance is one thing that many people avoid until they get older. What is life insurance? Why do people get life insurance?
Life insurance is a type of insurance that pays out a sum of money either on the death of the insured.
Simply put, it is a contract with an insurance company. The insurance company takes monthly premium payments from you in exchange for providing a lump-sum payment to your beneficiaries when you die.
Life insurance is designed to replace a person’s income or cover special needs for your family when you aren’t around to provide income. It is very important when you do have a family. It’s a way to take care of them and show them you love them enough to keep taking care of them after you are gone.
That is the most basic definition of life insurance, but there are many additional types and variations.
What are the types of Life Insurance?
There are two basic types of life insurance available:
- Term life insurance
- Permanent life insurance (which includes whole and universal life)
Term life insurance policies provide insurance coverage for a set period of time. The most common terms for life insurance are between 10 and 30 years. At the end of the term there is nothing left. There is no cash value component to a term life insurance policy.
Permanent life insurance policies provide coverage to last your entire life and also includes a cash value component. A portion of your premiums are invested by the insurance company and the cash value grows tax-deferred over time. The death benefit of these life insurance policies is immediately payable from the first day of the policy and the cash value builds up over time. Of these policies there are two types: whole life insurance and universal life insurance.
There are even more types of life insurance that are less common but can be purchased. You can learn about these when you submit an inquiry with an insurance company.
Do I Need Life Insurance?
In general, how do you know if you need life insurance?
In fact, up until a few years ago I didn’t even understand why life insurance was needed. When I was younger, broke, and in debt I didn’t have life insurance. When I grew older and had children, I finally got life insurance through Bestow.
If you are young and have no dependents then you likely don’t need life insurance.If you have people dependent on your income then you probably need life insurance to protect them.
Whether or not you need life insurance depends on your life situation and whether or not your need the financial protection and confidence.
Here are a few reasons you may need life insurance include:
- You are married
- You have children
- People depend on your income
- You are the sole provider for your family
- You want to cover funeral and burial expenses
- Your house has a mortgage
- You have large debts
- Your a business owner
- You want to build tax-deferred cash value
- You want to supplement your retirement income
These are just a few of the reasons why people get life insurance and there are more.
Do I Need Life Insurance For A Mortgage?
A home is usually the largest asset many people have. Because of this people wonder if they need life insurance for their mortgage so their family will remain in their home.
There are typically two options for life insurance for a mortgage:
- A term life insurance policy that pays out enough money that your family could pay off the mortgage if you pass away.
- A mortgage life insurance policy that directly pays off the mortgage when you die.
Mortgage life insurance is different than regular life insurance and it should not be confused with mortgage insurance (the insurance you must take out when you have an FHA loan or a lower down payment on a conventional mortgage).
Unfortunately the mortgage life insurance tends to feel very scammy and the mailers you get after buying a home use scare tactics and prey on emotions. They will say something like “If you died tomorrow, would your family be able to pay the mortgage and maintain their quality of life?”
Mortgage Life Insurance Benefits
Let’s look at some of the benefits of getting a mortgage life insurance policy:
- Pays off the mortgage when you die
- Can be useful if you can’t qualify for regular life insurance
Mortgage Life Insurance
It may be useful in some situations but there are also many negatives:
- Premiums fluctuate, often going up over time
- Policies shrink over time with dwindling payouts
- Age limits on policies
- No flexibility for your family in how the money is used
Do You Actually Need It?
Usually you come out better with a term life policy than with a specific mortgage life insurance policy. With the payout from a term life insurance policy your family can pay off the mortgage or choose to use the money for other needs. This can be useful if the mortgage rate is low or the payment is reasonable.
Most mortgage life insurance policies are not great because they offer no flexibility. The money from these types of policies is sent directly to your lender to pay off your home. This means your family has no choice in how the money is used.
These policies are also not super transparent and are harder to find quotes for online which makes it hard to compare and shop around. Without price transparency and comparison you are unlikely to get a good deal.
In the end you are much more likely to come out better with a term life insurance policy and making sure your family is financially literate and able to use the money in the best way possible when you pass.
How Much Life Insurance Should I Get?
The next question is always, how much life insurance should I get? Is it possible to get too much insurance?
The amount of life insurance coverage you purchase will depend on a number of factors:
- Debt obligations
- Years until retirement
- Other dependents
These factors will all combine to determine how much life insurance you need.
A common recommendation from professionals is at least 10 times your annual salary. So if you make $50,000 per year you should purchase a policy for $500,000.
However, your specific circumstances might make this number change. If you are the sole breadwinner or have a large mortgage or have many dependents then you might want to get more coverage.
Life insurance amounts should be enough to make sure your loved ones are taken care of financially so they don’t have to worry about money while grieving.
How To A Get A Life Insurance Policy
The best policy is the one that fits your individual needs. This will be based on how much you need for the payout and how much you can afford to may monthly for the policy based on your budget.
For a low monthly premium cost you will likely want to look at a term policy since these tend to be cheaper. If you are using your insurance to grow wealth then you may want a whole or universal life policy which will be more expensive monthly. You should compare between the monthly costs and payout benefits to pick a policy.
Here’s how to choose a policy:
- Decide the type of insurance you want to purchase.
- Figure out how much coverage you need and how long you want it to last.
- Submit an inquiry to an insurance company or broker to get policy quotes. (If you haven’t decided which type to get, pull quotes for all kinds of life insurance.)
- Compare the quotes from different providers and policies.
- Choose the insurance policy that meets your needs and budget.
- Submit your paperwork and payment information to begin insurance coverage.
- Schedule your medical exam if needed. (Or choose a life insurance policy with no medical exam.)
- Continue making monthly paymnets.
Remember that it’s ok to shop around for life insurance and choose the best fit for your needs. Don’t let an insurance sales person talk you into something that you don’t want or need. You can find and choose the best policy for yourself.
Things To Know About Life Insurance
There are a few things to know about life insurance.
Life Insurance Cost
The longer you wait to buy life insurance the more expensive it will be.
The younger and healthier you are when you get a life insurance policy the cheaper it will be.
Work Life Insurance Policies
Most companies have a basic life insurance policy on you as an employee and they also offer you the ability to buy additional life insurance.
These policies can be useful and are easy to get so many people take advantage of them.
However, it is important to remember that if you leave the job you can’t take this type of life insurance with you.
You can have multiple life insurance policies. Stacking multiple policies is actually a useful tactic and the best way to add or remove policies as your life and needs change.
A lot of people want to know if they can get life insurance with health issues. Can you get life insurance if you are a smoker? Can you get life insurance if you are obese? Is it possible to get life insurance if you have had cancer?
The answer is yes you can.
Most insurance companies will offer policies for all of these health situations but the cost will be higher. Most policies have contingencies for those who are “high risk” as well which is why many require a health exam.
Getting Life Insurance
Whether or not you need life insurance is very dependent on your particular life situation.
With young kids you likely need a good amount of life insurance. If your kids are grown and out of college then they probably won’t need the money from a life insurance policy. If you have enough assets to produce investment income replace your income then you might not need life insurance. Every situation is different.
While there are a few basic questions you can ask to determine whether or not you need life insurance, you should definitely do your research and look into the best options for your family.
Life insurance can be something that people want to avoid because it can be morose, but it is important to get in order to take care of your family. It is one of the most loving things you can do.
My Experience With Life Insurance
I personally chose to get a term life insurance policy with Bestow.
I had a work life insurance policy but also decided to get term life insurance outside of that policy.
The reasons why I personally decided to get life insurance:
- I knew that while I was covered at work, if I got laid off that policy wouldn’t go with me.
- If something happens to me I need to know my children are taken care of financially.
- We have a mortgage and if something happens to me and my income disappears, I want my house to be paid off.
- I want to make sure my family has the resources they need to survive if I’m not able to be here for them.
Things I wanted when I applied for life insurance:
- Term life insurance for 20 years because that would cover til my daughter graduated college.
- Easy to apply and get covered without jumping through hoops.
- No medical exam. I hate medical exams and I have conditions with mental health and asthma.
- Affordable rates. I knew that I’m not in perfect health but I wanted to find the best options available to me.
- I didn’t want to deal with a sales person trying to push whole life insurance that I didn’t want (this has happened the one other time I looked into getting life insurance personally).
Getting A Quote
What I’ve learned from this experience is that it’s worth getting a quote from a couple different companies.
It does not affect your credit and you can compare your options easily when you aren’t going through a long medical underwriting process. In my experience getting a quote and completing my policy took about 10 minutes start to finish (15 for me because I did record the experience and got distracted) and the whole process was so convenient that I’m kicking myself for not doing it sooner.
If you are looking for term life insurance, you can get a quote and see if you qualify! It’s worth applying to see if you can get rates as low as $15 a month for $250k with no health issues.
You can read about my experience here: Bestow Review: Term Life Insurance With No Medical Exam