Anyone who has started a business understands the commitment that must be made in terms of time and resources. Realtors who decide to open an office do a lot of planning to establish an office at a prime location. Yes, you can easily rent space for you and your team, but realtors are keenly aware of the advantage of ownership. The same thought process can be used for owning versus renting your home. Whether you are considering a home or an office, mortgage protection insurance is important.
Although renting a home or office space may be preferable in the short term, it just doesn’t make good financial sense in the long term. In most cases, it is difficult to customize your living or office space to meet your individual needs. Most rental agreements contain a lengthy list of things you cannot do, rather than a list of the things you can do. And, if you happen to be renting from an owner with little concern about the upkeep of your home or office, you may very well end up living or working in a building in need of significant repair.
Just like friends and family are unlikely to visit your home if there is no appearance of pride in ownership; it is even more unlikely that prospective customers will visit an office in a dilapidated building. People do not like to do business with people who appear unsuccessful. How you live is a key indicator of how you work.
The Challenge of Ownership
Although ownership is the best possible outcome when it comes to a residence or office, the challenges of getting there are formidable. In both cases, unless there are substantial resources available, a mortgage will have to be secured. And, although shopping for a mortgage is much easier because of technology, there is still a lot of work between an offer and a closing.
For residential real estate loans, buyers must provide an enormous amount of historical information for underwriters to make a lending decision, and business loans typically require all of that plus significant information regarding your business background.
A borrower is simply never in charge; rather, they assume the subservient position of a beggar in need. The good news is the reward typically outweighs the effort and resources expended to secure the loan in the first place.
What if the Worst should Happen?
So then, you’ve finally saved enough money for the down payment needed to buy that perfect home or perfect office building in that perfect location. Your closing, although time-consuming, went off without a hitch because you personally made certain that every “T” was crossed and every “i” was dotted. You are finally transitioning from a renter to a buyer and can now realize the benefits that will be presented. You are no longer throwing money down that giant rental hole, and you are buying the home or office you occupy now or will occupy very soon.
Soon the responsibility of this major purchase sinks in. Not the part about earning enough to pay your mortgage payments, but the part about what happens if you should die unexpectedly.
Since you are married and the lender required your wife to be on the mortgage, what will happen if you are gone, and your income stream ceases? How could she continue living in the home or owning the office building on just her income? These “what if” questions manage to keep you up at night, so you plan to speak with your insurance agent and ask for a solution.
Transfer Your Risk
After listening to your concern about how your wife could handle the responsibility of a home or office mortgage without your income stream, your agent, who operates in the world of risk management, presents you with a simple and affordable solution to your “what if” scenario. It’s called Mortgage Protection Insurance. The agent explains that by purchasing an insurance policy that will pay a death benefit equal to the outstanding mortgage, your wife would receive the money needed to pay off the mortgage if you should die unexpectedly.
Using Term Insurance to Protect Your Mortgage
Using term life insurance is the most affordable method of transferring a financial risk to an insurance company. It’s not new; in fact, there are many independent agents who specialize in Mortgage Protection Plans. Here’s how it works;
Fred Wilson and his wife have taken out a mortgage for $400,000 to buy a home they fell in love with. After making a 10% down payment, Fred’s monthly payment will be about $1700. Fred will depend on some of his wife’s income to help make the payments.
Fred takes out a separate term insurance policy with a $400,000 death benefit and a 30-year term which is equal to the mortgage term. If Fred died during the 30 year policy period, his wife would receive a tax-free death benefit of $400,000 to pay off the mortgage and allow her to continue living in the home as long as she wants to.
It’s important to note that the $400,000 can be used however Fred’s wife wants, but the specific reason for the insurance is to protect the mortgage from default.
This same term insurance could be used to protect a business mortgage or any other asset the insured wants to protect.
There are Options to Consider
When Fred is considering his Mortgage Protection Plan, there are optional coverages he should consider that will broaden the coverage of the policy.
- Return of Premium Rider
The Return of Premium rider provides for the insurer to return all premiums paid to the insurer if you are still alive at the expiration date of your term policy. Although there is an additional cost for this valuable rider, if it is purchased by young and healthy adults, it is a great value. Since the funds are considered a return of after-tax dollars, the lump-sum payment is provided tax-free.
- Additional Insured and Child Term Riders
Both of these riders are useful because they allow the insured to add a spouse and children to the term insurance policy. By doing so, the policyholder effectively creates an affordable family insurance plan. The additional insured can be added in an amount up to the limit of the insured’s coverage, and the children can be added by purchasing inexpensive units of coverage that insure all the children in the family and any future children that are born after the policy is issued.
By adding these two riders (there are several more available), you can include coverage for your spouse, especially if she is contributing to the mortgage payment, and get a refund of all premium paid into the policy if you survive the policy term, thereby having free insurance for 30 years.