Can I have a mortgage without a life insurance policy?
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UPDATED: Apr 25, 2022
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- You are not required in most cases, to purchase life insurance coverage when you take out a mortgage loan
- Lenders do require fire and property coverage when a mortgage is secured, but securing a life insurance policy is a good idea
- Any life insurance, term, permanent, or a combination will work when covering a mortgage loan
- In many cases, mortgage coverage is incorporated into an overall plan such as a programming or capital needs arrangement
It is not a requirement of lenders that a borrower in a mortgage situation owns life insurance.
While it is a requirement that a borrower has fire insurance in most cases, the life insurance is an option.
Many life insurance marketers use the new mortgage market as a time to get people to think about buying life insurance.
This is not illegal or a bad thing, and it is good for people to purchase life insurance to cover a mortgage.
If a mortgage holder were to die, then there would be money available to pay off the mortgage so a widow, for example, would have a place to live free and clear.
You could make the same case for life insurance to cover the rent too, as everyone needs a place to live and the life insurance could be geared to cover future rental payments in the same conceptual narrative.
There are several scenarios that could occur if a borrower should die, the most severe being that the heirs would have to give up the home and live elsewhere.
If life insurance covers the mortgage, then the best solution of heirs staying in the home is guaranteed.
Learn more about life insurance below and make sure to use the free quote tool above!
Mortgage Life Insurance
There is not a special or separate brand of life insurance called “mortgage life insurance.”
Life insurance is life insurance, and the amount of life insurance to cover a mortgage can be allocated with any term or permanent life insurance combination.
There is no doubt that when individuals secure a mortgage for their house or business, that it is a good idea to cover the debt with life insurance.
It is also a good idea to check different companies to get the best rates or the best plan for the needs of the borrower.
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Life Insurance Planning
It is customary for a good life insurance agent to help people plan their life insurance through a systematic process that takes into account all of their life insurance needs.
This system can be called “programming” or “needs analysis.”
Typically people have two separate areas of needs. One area is the need of cash requirements at the death of a breadwinner.
The cash needs of final expenses, an emergency fund, college education and other debts would fall into the first area.
The second area of income needs would cover family income until such times when the children are grown, and then that can be adjusted.
In other words, the entire landscape of total needs is addressed over a period of years.
In a programming situation, an amount of life insurance is placed that will cover the cash needs in a lump sum amount, and the income needs using settlement options.
Settlement options are a prescribed income stream based on factors that take the death benefit amount and then apply the amount to the factors to turn it into a definite income over a period of years
Another method of determining the amount of life insurance for a family is to do a “Capital Needs Analysis.”
It establishes the amount of life insurance needed to provide a present value of capital that will provide an amount of the cash needs and the income needs without liquidating capital for income purposes.
What is a Mortgage?
A mortgage is a special type of loan that a lender or a bank uses to finance a house or business property over a period of years.
Typically from 80 percent to 90 percent of the total price of the property is financed while the borrower pays the 10 to 20 percent upfront.
The real estate, whether it be a residential home or a business property is the collateral for the loan which is usually paid on a monthly basis and includes the principal, interest, insurance and taxes.
There is a type of mortgage sponsored by the Federal Government, called an FHA mortgage.
This has a small insurance premium that the borrower pays, which helps borrowers get loans with smaller down payments, and the insurance helps to defray costs if borrowers default.
A mortgage pays the note off over a period of 15 to 30 years, with the majority of the payments in the earlier years going towards interest.
As the mortgage note gets paid off, the principal, or the amount owed, becomes more of the payment percentage.
If you graph the mortgage over the term of payments, you get a parabolic curve which represents the amount owed at any point in time.
–Buying Life Insurance to Cover a Mortgage
If you are shopping for life insurance to cover a mortgage, there are several ways to accomplish this task.
Some companies have a special mortgage term configuration where the death benefit will fit any interest rate and will cover the outstanding balance that is due.
Many lending institutions have this sort of coverage available.
A person with poor health can usually get coverage this way as most plans through an institution are group insurance plans.
A bit of good advice is to buy your own personal mortgage coverage policy because then you can make the beneficiary a spouse or another individual, rather than the mortgage lender.
This gives the beneficiary the choice of either paying off the mortgage loan in a lump sum or taking the option of continuing to pay the mortgage payments.
A level term policy could also be used to cover a mortgage, with the idea that if the breadwinner dies, the mortgage would be paid off, and the difference between the death benefit and the mortgage amount would be an extra benefit for the beneficiary.
A permanent life insurance policy can also be used to cover a mortgage debt, and the cash values can be used as capital that would be available to prepay the mortgage in advance, thus saving considerable interest on the mortgage payments.
There is a large segment of the life insurance industry that focuses on the mortgage markets.
When people secure a mortgage with a lending institution, the marketing company sends out a large volume of direct mail which looks as though it has come from the lender.
At any rate, it looks official, and it could be taken to mean that the mortgage lender requires that life insurance is purchased.
In the “mortgage life scenario,” an agent will follow up on replies that consumers make from the mailers.
The advantage to the consumer is the reminder that it is a good idea to cover the mortgage.
However, there is usually not a choice companies from which to choose, as most of these campaigns are sponsored by a single life insurance company.
While the necessity for mortgage life insurance coverage is not required by mortgage lenders, it is certainly a good idea to purchase coverage that will pay off a mortgage in full, or provide the funds for the beneficiary to continue to make the mortgage payments.
A mortgage is a significant financial commitment in anyone’s budget, and an untimely death can change the entire lifestyle of a beneficiary and any dependents.
If a family had to give up a home because they couldn’t afford it due to the death of a breadwinner, it would be a significant life event that would change anyone’s future.
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