Take a deep breath – you did it. You bought (or are planning to buy) your first home. It can be a long, grueling, and expensive process, but when it’s over? You’re a first-time homeowner.
It’s a good feeling, right?
Once you’ve finally finished with all of the effort of buying your first home, it’s equally important to protect your investment. You’ll surely have homeowners insurance all figured out, but what about life insurance? You might sleep a little easier knowing that if you were to pass away, the payout from a life insurance policy could help your loved ones continue to manage the mortgage. Here’s why getting life insurance as a homeowner can be important.
Why Do You Need Life Insurance as a Homeowner?
Home ownership comes with myriad new responsibilities. The most obvious: your mortgage commitment. For the foreseeable future, you and your partner are responsible for making hefty and timely mortgage payments. But hey, you planned for that, so no biggie.
But what if one of you were to pass away? Your surviving spouse (and any kids that have come into the mix) will be left with the mortgage payments, as well as car payments, utility costs, and other bills. Though your mortgage servicer and utility providers may express their condolences, their primary concern is receiving payments on time – even if your family has been struck by tragedy. And while some may offer a brief grace period, your loved ones will ultimately be on the hook for the total of those bills.
As a homeowner, it’s important to consider life insurance coverage for any personal property you haven’t fully paid off. A life insurance payout can help keep your family on track after an unexpected death, helping them to keep their home and up to date with other bills.
The Different Types of Insurance Policies for Homeowners
The good thing is that there are different life insurance coverage options allowing you choose the best life insurance coverage for your situation. The different types of insurance products to consider include:
- Term Life Insurance Policy – Term life insurance offers life insurance coverage for a set period of time. If you were to pass away while owing a significant amount of mortgage debt, a term policy could potentially provide more than enough cash to pay it off. Term life insurance is offered by a life insurance company, not your lender.
- Mortgage Protection Insurance Policy (MPI) – Mortgage protection insurance, also called mortgage protection life insurance, is specifically intended to protect the borrower and their loved ones by providing the funds needed to cover the mortgage if you are temporarily unemployed, or pays it off completely if you die unexpectedly. MPI is offered through your lender, or by an unaffiliated insurer.
- Private Mortgage Insurance Policy (PMI) – Private mortgage insurance, on the other hand, protects your mortgage lender. PMI only repays your mortgage balance if you default and does not protect you after job loss, disability, or unexpected death. Lenders usually require you to buy PMI if your down payment is less than 20%.
|Type of Insurance||Pros||Cons|
|Term Life Insurance||Usually easy to apply for and can be an affordable life insurance option. Death benefit can be used as needed and could help pay the balance of your mortgage, as well as provide additional benefits to your loved ones.||Generally does not provide coverage for circumstances like job loss, but could potentially provide coverage for disability with a policy rider.|
|Mortgage Protection Insurance||Pays off the balance of your mortgage if you die. May cover mortgage payments if you lose your job or become disabled for a limited amount of time. Minimal or no underwriting, so cost is based on the amount of your mortgage, your age, and your smoking status.||Reduced benefit over time as you pay down your mortgage. You pay level premiums as mortgage debt decreases. Your loved ones don’t receive a death benefit.|
|Private Mortgage Insurance||Protects your mortgage lender in the event of default.||Does not provide coverage for circumstances like job loss, disability, or death.|
Determining Which Type Of Insurance You Need
To determine which type of insurance is right for you, you have to take stock of you and your family’s financial needs. Calculate how much life insurance to purchase by considering, along with your mortgage, family expenses like the cost of food, utilities, childcare, education, cars, extracurricular activities, and house maintenance.
If the loss of your income means that your family won’t be able to meet their current or future financial obligations, the amount of coverage offered by mortgage protection insurance and private mortgage insurance likely won’t be enough. For a similar rate, term life insurance could help cover the cost of your mortgage, as well as childcare, your family’s monthly expenses, and even college tuition tuition depending on how much coverage you qualify for and need.
Once you’ve figured out your family expenses and needs, you can calculate the coverage amount and term insurance option that best fits.
Do You Need Life Insurance When Buying A House?
It’s not a legal requirement to have life insurance before buying a house. However, because homes are such a big expense, some lenders may not approve mortgages for borrowers without life insurance policies in place.
What’s The Difference Between Term Life Insurance And Whole Life Insurance?
Term life insurance provides coverage to a policyholder for a set amount of time, like 10, 15, 20, 25, or 30 years. That’s the “term” – a period you choose when you buy your policy. Coverage amounts can range from $50,000 into the millions of dollars, and you pay a set monthly premium for the duration of your term.
Whole life insurance, on the other hand, is a type of permanent life insurance, meaning policyholders are guaranteed a death benefit. Some policies even offer a cash value. Whole life insurance is more expensive than term life insurance, when comparing policies with the same coverage amount.
If you’re looking for more information, we’ve covered the differences between whole life insurance and term life insurance, in more detail.
Choosing the Right Life Insurance for First-time Home Buyers
“Best” is subjective when it comes to choosing life insurance for new homeowners. Before deciding on mortgage protection or life insurance coverage, shop around and research your options. Term life insurance may be an excellent product for people with a mortgage because it's affordable, and homeowners can customize their policy’s term.
With Bestow, you can apply for a term life insurance policy that matches the amount of your mortgage – and for some, this coverage can cost less than $1/day.
Bestow’s application is simple and will take only a few minutes of your time (much less stressful than signing closing documents). Upon approval, you can purchase up to $1.5 million in coverage.