Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan?
Yes, the purchase of a new mortgage protection term insurance policy is usually not required by the lender. 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.
Credit life insurance is frequently recommended in conjunction with the taking our of an installment loan when purchasing expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy?
Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, the purchase of credit life insurance is normally not advisable due to its relatively high cost.
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 to cover a range of mortgage repayment periods, e.g., 15, 20, 25, or 30 years. Although the face amount decreases over time, the premium is usually level in amount. Further, the premium 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.
How does mortgage protection term insurance differ from other types of term life insurance?
How much life insurance should an individual own?
Should term insurance or cash value life insurance be purchased?
Although a difficult questions - one whose answer will vary depending on circumstances - several principles should be followed in addressing the issue. It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered:
The question contained in (1) involves an "insurance" decision and the questions contained in (2) required a "financial" decision.
The "insurance" question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way in which this needed amount of insurance can be afforded is through the purchase of term insurance with its lower premium.
If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the "financial" decision - which type of policy to buy. Important factors affecting the "financial" decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.
Rough "rules of thumb" suggest an amount of life insurance equal to six - eight times annual earnings. However, many factors should be taken into account in determining a more precise estimate of the amount of life insurance needed.
Important factors include:
It is recommended that a person's insurance advisor be contacted for a precise calculation of how much life insurance is needed.