Insurance can be used as a mortgage protector

A person is a proud owner of a new home, rental property or real estate, and obtained a mortgage because the lender felt comfortable with his income level and financial situation.

But what happens if he, as the primary income producer or even as half of a dual-income situation, dies?

Besides the emotional trauma, a surviving spouse could experience a significant drop in the household's level of income, a drop that may produce severe financial problems that could lead to foreclosure.

That's why many banks and mortgage companies encourage homeowners to purchase mortgage life insurance.

Whose makes sense?

Basically, a homeowner purchases mortgage life insurance so that in the event of an untimely death, funds are available to meet any outstanding mortgage balance.

But from whom should a property owner purchase such protection?

When he buys insurance from a bank or mortgage company, he generally loses all ownership control.

Sometimes the lending institution pre-prints its name on the beneficiary line of the policy.

The owner pays the premiums and the lender receives the proceeds at the insured's death.

The owner's family receives the deed to the house.

While this may seem like an equitable solution, there are several reasons why a spouse may not want to remain in the home:

The daily reminders of the loss may be too difficult to handle.

The house may simply be too big to maintain.

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

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

Personally owned insurance

Rather than insurance offered through a lending institution, the homeowner might want to consider purchasing personally owned life insurance, which puts him or her in the driver's seat.

The spouse (assuming the spouse is the beneficiary) not the lender receives the insurance proceeds at the owner's death. And then the spouse can decide what to do with that money.

He or she can use the proceeds to pay the mortgage in one lump sum or continue paying it down periodically.

There are other advantages to consider.

Personally owned life insurance is portable, which means that if the insured moves in a few years, the insurance won't have to be replaced, which could be a costly process. Furthermore, even after the mortgage is paid, personally owned life insurance can provide a valuable insurance benefit.

What insurance is right?

There are different types of personally owned life insurance. Term insurance lets the insured purchase insurance protection for limited periods of time at a competitive price. Coverage is available in one-year, five-year and other time increments. There is a guaranteed death benefit, provided premiums are paid when due.

Generally, term insurance is convertible to permanent life insurance without showing proof of insurability.

Permanent insurance plans, such as whole life, are pricier than term products, but give the benefit of building cash value. A portion of the premiums paid for permanent insurance coverage builds tax-deferred cash value each year.

With whole life, the buyer is insured for life, provided the premiums, which remain at a fixed level, are paid.

While the insured may initially purchase whole life insurance as a mortgage protector, he can access the cash value accumulation for other means, like college funding.

Permanent life insurance also allows customizing a plan by adding optional riders. And there is a guaranteed death benefit, generally free from federal income tax.

Some insurance companies now offer innovative plans that combine the guaranteed death benefit and cash value accumulation of permanent life insurance with the affordability of term insurance.

As needs change over the years, such plans allow converting the term portion into whole life.

Should homeowners wait?

The answer is, simply, no. Whether a homeowner decides to purchase mortgage life insurance through a bank or personally owned life insurance, the key is to be prepared.

There is a real chance that someday one person will be solely responsible for the family's finances.

Taking the necessary steps today can ensure their financial future tomorrow.

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