Q. Can an existing life insurance policy be used to repay an outstanding mortgage loan?
A. Yes. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance, in the event of the insured's death. The lender does not usually require the purchase of a new mortgage protection term insurance policy.
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Q. How does mortgage protection term insurance differ from other types of term life insurance?
A. The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies are generally available for a range of mortgage repayment periods (e.g., 15, 20, 25 or 30 years). Although the face amount decreases over time, the premium usually remains roughly the same, and the payment period often is shorter than the maximum period of insurance coverage (for example, a 20-year mortgage protection policy might require that level premiums be paid over the first 17 years).
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Q. Should term insurance or cash value life insurance be purchased?
A. The answer will vary based on individual circumstances. First, there are two basic questions that must be answered:
- "How much life insurance should I buy?"
- "What type of life insurance policy should I buy?"
Question 1 involves an "insurance" decision and Question 2 requires a "financial" decision.
The "insurance" question should always be resolved first. For example, the amount of life insurance that you need may only be affordable through purchasing term insurance, which has lower premiums than cash value life insurance.
If you are able to pay for the desired amount of life insurance under either type of policy, you should then consider "financial" side to decide which type of policy to buy. Important factors affecting the "financial" decision include your income tax bracket, whether you need life insurance in the short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.
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Q. What about purchasing life insurance on a spouse and on children?
A. In certain circumstances, this may be advisable; however, the income-earning capacity of the primary breadwinner should first be fully protected through the appropriate amount of life insurance. In a dual-earning household, it is important to protect the income-earning capacity of both spouses. Life insurance on a non-wage-earning spouse may be useful to pay for household services, childcare, and unforeseen expenses in the event of his or her death.
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Q. How much life insurance should a person have?
A. Rough "rules of thumb" suggest obtaining life insurance equal to 6 to 8 times your annual earnings. However, many factors should be taken into account to determine a more precise estimate, including:
- Income other than salary/earnings
- Marital status; if married, the spouse’s earning capacity
- The number of individuals financially dependent on the insured
- Amount of death benefits payable from Social Security and/or an employer-sponsored life insurance plan
- Any special life insurance needs (e.g., mortgage repayment, education fund, estate planning, etc.)
Speak to an insurance adviser for a precise calculation of how much life insurance you need.
Posted in: Life Insurance