Home buyers can retain control with mortgage insurance

A home buyer recently purchased his dream home. Chances are he took out a long-term mortgage, borrowing a significant amount of money.

The question is, how would his family continue to meet its mortgage obligations if he, the primary income producer, were to die?

Besides the emotional trauma the family would have to face, there could be a significant drop in household income. This is why many banks and mortgage companies encourage homeowners to purchase mortgage insurance in order to offset the income reduction that can occur should the household wage-earner unexpectedly die.

Outstanding balance

Mortgage insurance is a life insurance policy that, in the event of an untimely death, funds the outstanding mortgage balance.

With insurance from a bank or mortgage company, the insured generally loses all ownership control of the policy. He pays the premiums and, the lender receives the proceeds. The insured's family then receives the deed to the house.

On the surface this may seem like an equitable solution, but there are several reasons why it may not be the best one:

The daily reminders of the insured's absence and their loss may make it too difficult for the family to remain in the home.

The home may simply be too big to maintain.

The surviving spouse may want to move closer to friends and family.

The surviving spouse may need to relocate to a better job or school district.

It may make better financial sense not to pay off the mortgage in its entirety, which would cause the surviving spouse to lose the tax deduction on the interest payments.

Personally owned insurance

Instead of insurance offered through a lending institution, the home buyer may want to consider purchasing personally owned life insurance. Personally owned life insurance puts the buyer in control.

By purchasing insurance directly from an insurance company, he or she owns the policy and has full control over the options. The owner chooses who receives the insurance proceeds in the event of death, and the surviving family can decide what course of action to take.

Insurance options

A variety of insurance products can be used to provide mortgage protection. These include term insurance, permanent insurance and combinations of term and permanent insurance.

Term insurance may be better because it lets the home buyer purchase a large amount of protection at a competitive price. Term insurance is ideal when the insured only needs the coverage for a limited period of time, and is generally convertible to permanent insurance at a later date. The cost for term insurance may, however, increase as the insured gets older.

Permanent insurance is what its name implies permanent. Once the insured buys a policy, he is insured for his whole life, provided he pays all premiums due. Premiums are level and fixed for life.

Cash value

Additionally, a portion of the premiums paid for permanent insurance coverage builds cash value each year, which can be accessed through policy loans to help meet future needs.

Some insurance companies offer the guaranteed protection and cash value accumulation of permanent insurance with the affordability of term insurance. As needs change over a lifetime, these plans generally allow the insured to convert the term portion to permanent insurance. This helps boost the cash value accumulation in later years.

Whether a home buyer decides to purchase mortgage insurance through a bank, or personally owned life insurance, the key is to be protected. Taking the necessary steps today can help ensure the surviving family's financial security tomorrow.

(Buckley Van Hooser is an agent for New York Life Insurance Company and a registered representative for NYLIFE Securities Inc.)