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Homeowners’ Life Insurance Options

Insurance, Life Insurance
Homeowners’ Life Insurance Options

Buying a home usually means taking on one of the biggest financial obligations of your life. A homeowner’s life insurance policy can be essential financial protection, particularly when you’re obtaining a mortgage with a partner.

Homeowners with a mortgage spent an average of $12,639 on their mortgage payments (not including insurance) in 2014, according to the U.S. Bureau of Labor Statistics. That amounted to 13% of the $97,309 average pretax income among homeowners who had a mortgage. House payments take up a larger share of income for many first-time buyers and in many parts of the country.

Mortgages can become unaffordable if one partner dies. You wouldn’t want your family to have to move and find a cheaper home if you were no longer around.

Here’s how life insurance can help.

Term life insurance can cover your mortgage

Term life insurance promises to pay a set amount if you die while the policy is in effect. You choose the coverage amount and how many years the policy should last. All the best life insurance companies sell term life.

New homeowners can buy a term life insurance policy timed to match the duration of their mortgage. For example, if you have 20 years left on your mortgage, you could buy a 20-year term life policy. If you want the same policy to cover other obligations, like replacing your income if you die, you would buy a policy with a longer term and a higher amount.

» COMPARE: NerdWallet’s life insurance comparison tool

Mortgage life insurance has limited benefit

An alternative to term life insurance is mortgage life insurance, which serves one purpose: It pays off your mortgage balance if you die. It pays the exact amount of the mortgage balance, and the payout goes directly to the lender, not your spouse or family.

Therefore, families are usually better off with a term life insurance policy. The policy amount can encompass more than just the mortgage balance, and your family members can use the payout for their most pressing financial need, whether it’s the mortgage, health care, college or another issue.

Mortgage life insurance might make sense if you need life insurance to cover a mortgage but you have a health issue that would prevent you from qualifying for term life coverage. Here’s more on mortgage life insurance vs. term life.

Permanent life insurance may be too much

A permanent life insurance policy lasts your entire life and builds cash value over time. It can be considerably more expensive than term life. If your family’s financial obligations are finite — like the years covering a mortgage or college tuition — term life insurance is suitable and will give you more bang for your buck.

NerdWallet’s life insurance comparison tool can help homeowners find the right coverage amount and compare rates.

Aubrey Cohen is a staff writer at NerdWallet, a personal finance website. Email: acohen@nerdwallet.com. Twitter: @aubreycohen.


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