In an era of large home purchases and jumbo mortgages, how does a buyer ensure his home is properly protected from future disasters? We must first evaluate and determine the types of disasters that can befall a home owner. Once these are determined, the owner should then decide which risks they are willing to accept and which risks they would prefer to have insured.
This article will deal with the risk of death or disability of the primary income earner homeowner. In every circumstance, working with the right advisor is the first critical decision in determining insurance requirements. The advisor should do a complete financial evaluation prior to determining a plan of action. Once the owners are comfortable they have the right advisor, they should then think about the effects the death or disability of the primary income earner would have on the rest of the family.
For example, an investment banker earning $2 million per year could require a different plan than the owner of a software development company earning the same income but with equity in the company and a properly funded buy-sell agreement with his partners. In either case, the risk of loss of income is the most important criteria relating to home mortgage protection. In many cases, the risk of disability is much greater than the risk of death, but both need to be effectively addressed. Disability insurance can be acquired to replace a complete income stream for virtually any level of income if the advisor is using the right market resources.
Life insurance comes in many varieties. In this article we will only address the 3 most relevant policies for mortgage protection.
Term Life Insurance- This type of policy pays a death benefit only during the term that the buyer determines at policy acquisition. The term can be one, five, ten, fifteen, twenty or thirty years. The premiums are fixed for the entire time period, but at the end of the period there is no value left and the insurance is gone. For those who are just concerned with income replacement, this is the cheapest for of insurance.
Guaranteed Universal Life Insurance- This type of policy is used to provide permanent protection while keeping the costs as low as possible. These policies are best used to deal with large estate planning needs as well as long term mortgage protection for clients whose age may impact the ability to use term insurance for the full term of the debt.
Whole Life Insurance- This type of policy provides clients with many benefits beyond the pure death benefit. These include tax free cash build up, modest but steady rates of return, and in many states creditor protection. For these reasons the premiums are significantly higher, however the value the insured and their family receives more than adequately compensates for the cost. Whole life has been the savior of many families for nearly 200 years. The policies have performed very well throughout every major financial crisis this country has endured. When used properly as part of an overall financial plan, whole life insurance is a valuable asset class that should not be overlooked.
In addition to using insurance for protection, having the proper documentation is crucial. The proper use of trusts and other planning vehicles can provide significant risk mitigation without the need for insurance. Proper planning requires the use of knowledgeable professionals to help create the right structure for each situation. This is not the time for do-it-yourself planning. Use the resources available to you to keep your assets and family protected.