There are a few milestones most of us enjoy in life, and they usually involve keys. Getting the keys to your first car is a biggie when you're younger and have just passed Driver's Ed. Then there are the keys to your humble abode. Buying your first home is a special moment and probably the largest financial outlay you'll ever make. For that reason, it's worth considering a life insurance policy, which can give you more security in your new place. How, you ask? That's what we're here to tell you with this guide to life insurance for homeowners.
Why do I need life insurance if I’m a homeowner?
Remember the bit where we mentioned how buying a home will probably be your most expensive purchase? Well, unless you've got millions stored somewhere and are considering a bid for an NBA franchise, it's safe to say that you'll never spend more than you do on your house.
Again, unless you’re blessed with millions, you’ll probably need a mortgage to purchase your home, and a mortgage needs paying off. A recent study from NBC found that almost half of American families would struggle in the first month if the primary income earner passed away.
If you’ve bought it with your spouse and have a family or are planning to raise one, then they probably rely on you for support for things like day-to-day living and the mortgage. And if you suddenly weren’t around anymore (we know; it’s not the type of scenario you want to think about, but hear us out), how would they pay for the mortgage?
With the right life insurance policy in place, the outlook is a lot less bleak. The death benefit provided from the payout helps cover the mortgage payments and allows your family to maintain the same quality of life if you’re no longer around. That gives you added peace of mind and safeguards your family’s future should the worst happen.
Fair point. So which life insurance policy should I get?
Most homeowners with a mortgage jump straight into a term policy without doing a ton of research. Term life insurance is the cheapest available, but it only covers you for a specific amount of time. This is one of the reasons homeowners get it, as coverage supports you while the mortgage is in place. If you’ve got a mortgage for 25 years, it’s not uncommon for term life insurance for homeowners to cover them for that time.
Sounds great, right? It’s not too shabby, but that’s pretty much all a term policy offers. There are no bells and whistles attached, and once the policy is over, it’s pretty done. If you decide to extend, the new premium is based on your health and age at the time of renewal, so you’ll likely find yourself paying double or triple than when you got your first term life insurance policy. There’s also the risk that you may not qualify at all in the event of a negative health change.
The other primary life insurance option involves getting a permanent policy. Perm life insurance does what it says on the tin: as long as you keep making the payments, it doesn’t expire. As a result, the premiums are slightly higher than term coverage, but they never increase. That means you’ll pay the same for life insurance in your, let’s say, 20s as you would when you’re a senior citizen. Essentially, permanent life insurance works out as a better investment in the long term.
But that’s not all, as perm policies also provide benefits while you’re still alive. Yes, you read that right–permanent life insurance has you covered in both life and death. It’s all thanks to something called “cash value”, which allows you to build wealth while you’re still breathing sweet, sweet air.
When you pay into the perm policy premium, you cover two aspects: the death benefit and cash value. Both of these grow over time, and you can access the money you’ve built up while you’re still alive. Suddenly, a permanent life insurance policy becomes a form of investment account as well as a way to protect your mortgage payments and look after your family if you pass away unexpectedly.
Is there anything else I should know about a permanent life insurance policy?
Oh, you bet there is. A perm policy also allows you to withdraw the money you've built tax-free. How does that work? When you withdraw money, you can do so in the form of a 0% loan to yourself–and because you can't pay yourself tax, the money is tax-free. The death benefit pays off the loan when you do pass (hopefully many, many years down the line). But because you've grown the death benefit over the years, you'll still have plenty left to leave to your beneficiaries.
Having the cash-value aspect changes the entire dynamic of life insurance and gives you food for thought if you're a homeowner. You can ensure the mortgage payments are taken care of while also building wealth to use for whatever you'd like. An extension to your house, perhaps?
Do riders help with life insurance for homeowners?
Ah, yes, life insurance riders. One of the best aspects of life insurance is the ability to customize it to fit your needs. With a rider, you can add extra elements to your policy and cover so much more than a death benefit and cash value accumulation.
If you’re a homeowner, this should appeal as it allows you to look at the bigger picture with riders like long-term care. This particular rider provides professional help later in life if no other family members are around to look after you.
You can also get an accelerated death benefit rider. This lets you tap into the death benefit if you fall seriously ill or injure yourself and are unable to work as a result. Accelerated death benefit riders are particularly helpful if you have a mortgage to pay but can no longer earn an income through work due to your physical capabilities.
In summary: home is where the heart is
Life insurance for homeowners is a smart move if you want to cover every angle and ensure the house is paid and family looked after if you unexpectedly passed away. And with permanent life insurance, you can also see the benefits while you’re still alive and build wealth while protecting your home.