Paying your bills each month can be incredibly stressful, especially in a volatile economic climate. It’s crucial that you pay your mortgage to stay in your house, but there may be some months when it’s just too difficult to make ends meet. If you have a life insurance policy in place, you may wonder if your bank can take that policy as a mortgage payment to prevent foreclosure. Here’s what you need to know about life insurance and mortgages.
Whole and Universal Life Insurance
If you have a whole life or a universal life insurance policy, you may be able to use any cash value that you have accrued to pay for your mortgage. These policies are permanent and last for your
entire life, and in addition to a death benefit, they have a cash value portion that you can access while you are still living. When you pay your life insurance premiums each month, part of that money is put into an account where it can grow with interest. Some policies have a fixed interest rate, while others will actually invest your cash value so it can grow even further. If you are struggling with your mortgage, contact your insurance agency to start the process of cashing out your policy.
If you want the option to cash out your life insurance policy in the future, make sure you opt for a whole or universal life insurance policy instead of a term life insurance policy. Whole and universal life insurance policies are typically more expensive than term policies. However, they provide extensive coverage for your entire life, and they also provide the savings options that can help you should you get into a challenging financial situation. Whole life insurance policies are typically the most comprehensive in terms of death benefits and cash value accruement. Universal life insurance is slightly more flexible – you usually have the option to adjust your death benefit as you go, and in some cases, you can even change your payment schedule to suit your financial needs.
Unfortunately, if you have term life insurance, you won’t be able to cash it out to pay for your mortgage. However, if you are worried about your family’s ability to pay for your mortgage should anything happen to you, it may be worthwhile to take out a term life insurance policy that covers your mortgage amount. Term life insurance policies are typically quite affordable, and many people use them specifically for this reason.
Mortgage Protection Insurance
If you are a homeowner, and particularly if you are struggling to make your mortgage payments, you have probably seen ads online and flyers in the mail for mortgage protection life insurance. This is a specific type of life insurance designed to cover the cost of your mortgage if you die. There are a few different ways this mortgage insurance can work. In some cases, the death benefit will go down as you make payments on your house, and the premium prices will go down as well. In other cases, the death benefit stays fixed until your mortgage is paid off, and the premiums stay fixed as well. While mortgage protection insurance may seem tempting, it usually only makes financial sense if the premiums and death benefit stay fixed throughout the entire term. In many cases, it makes more sense to purchase a standard term life insurance plan, where you can get more coverage for a better price. The only potential downside to this is that traditional life insurance will most likely require a medical exam, and premiums could be dependent on your health. If your health is poor, you may qualify for a larger benefit with mortgage protection insurance.
Life Insurance Garnishment
If you are a life insurance beneficiary and the original policyholder still has outstanding debts like a mortgage, there is a chance that the bank could garnish your death benefit in order to pay off the mortgage. You can prevent this from happening by paying off the mortgage yourself upon receipt of the death benefit. Life insurance garnishment is only legal in some states – for example, in places like Texas and Florida, death benefits are protected and banks cannot garnish them to pay debts.
Unfortunately, debts don’t go away in the event of your death, and the responsibility often falls on your partner or family to make things right with your creditors. If you are in a good financial situation now, setting up a life insurance policy for the future can prevent difficult situations down the line. Since there are so many different types of life insurance available, it’s important to talk to an independent insurance agent who can help you find the best option for your needs. You might be surprised at how affordable some life insurance policies can be, and they can really make a difference in your family’s overall financial security.
