Life insurance when buying a house. What type of life insurance do I need?
Life insurance when buying a house
Life insurance might have been one of the last things on your mind, but if you are in the process of buying a house, it’s the perfect time to find out whether you need it or not.
This guide examines everything you need to know about life insurance when buying a house.
Table of contents
- What type of life insurance do I need?
- Types of life insurance policies
- What type of policy do I need?
- Taking out life insurance when buying a house
- Differences between life and mortgage life insurance
- Life insurance for homeowners FAQ
- Life insurance cost
What type of life insurance do I need?
The first step to buying the right policy is understanding the type of life insurance you need.
To use a life insurance policy toward your home purchase, you need to have what’s known as “permanent” life insurance.
The name permanent life insurance implies that it covers you for the entirety of your life and for as long as you pay your premiums.
Permanent life insurance is sometimes called whole life insurance.
Types of life insurance policies
Permanent life insurance policy
Permanent life insurance policies accumulate cash value over time, and the more premiums you pay, the bigger the value.
Once it reaches a sizeable balance, you can tap into that value and borrow against it similarly to a credit card or loan.
Borrowing against your life insurance policy will incur costs. You’ll pay interest monthly (or from the policy’s death benefit) until the debt is repaid.
Universal life insurance policy
Some insurance companies offer what’s known as “universal” life insurance. This type of insurance allows you to put extra money toward the policy, meaning a bigger cash value can accrue over time.
Certain variable life insurance policies can also be used to purchase your new home. The cash value of these insurance coverages tends to fluctuate with the market.
Term life insurance policy
The coverage known as “term” life insurance is one type you can’t use toward your house purchase.
This is due to these life insurance policies not having a cash value and can’t be borrowed against.
Life insurance as a liquid asset
Cash-value life insurance policies can help you buy a loan in two ways.
First, these policies can be considered liquid assets, which could work in your favor. Mortgage lenders place a high priority on this factor when evaluating borrowers.
Furthermore, permanent life insurance policies and other liquid assets mean accessible and almost instant access to cash. If you, as the borrower, were to fall behind on your mortgage payments, you could easily borrow against your life insurance policy.
By design, this financial protection works to the advantage of the borrower as it gives lenders more confidence to lend the funds required, and it could also result in lower interest rates.
Key points
A permanent life insurance policy provides the following advantages:
- An easier mortgage application
- Higher chances of loan approval
- Potentially more affordable rates
Life insurance as a down payment
Cash-value life insurance policies can also help with closing and down payment costs.
This option is advantageous if homebuyers with permanent or whole life insurance want to borrow against their policy and secure the amount needed to pay a down payment, closing costs, or other expenses required to purchase the home.
A higher down payment can also result in lower interest rates, a cheaper mortgage payment, and more loan options. All of these are a bonus and have long-term benefits for a homeowner.
Key points
Permanent and whole life insurance can be borrowed against and used for things such as inspections, repairs, renovations, furniture, decor, or moving costs.
Permanent life insurance policies can help cover down payments and up-front purchase costs.
What type of policy do I need?
It will help to consider who you are trying to protect and for what purposes when determining the type of policy you need.
Suppose you have any dependents, such as a partner, children, or someone else who relies on your income. In that case, you could consider taking out a life insurance policy to help financially protect them.
If your dependents would struggle to pay the mortgage if you were no longer around, you should consider protecting your mortgage.
Regardless of what type of life insurance policy you choose, it will provide financial security to your loved ones.
Taking out life insurance when buying a house
If you’re unsure about what policy to choose, you should ask your insurance agent or financial advisor for advice before you make any decisions. You must understand how taking out a life insurance loan will impact your policy.
You must look out for the small print, as there can be many hidden expenses and tax implications, and you run the risk of losing your policy if any mistakes are made.
As you don’t have to repay the loan, borrowing from a permanent life policy can seem too good to be true. However, any money you borrow and don’t pay back will be deducted from the death benefit your beneficiaries will receive.
Many people forget to factor in interest, as an additional amount will be owed on the borrowed amount. Interest starts to accrue if you don’t pay back the loan, increasing the amount you owe, and you’ll be paying interest on your interest.
While the loan doesn’t have to be repaid, the interest does. You need to remember that if the amount borrowed plus any interest exceeds your policy’s cash value, you risk losing it.
It goes without saying, borrowing against your life insurance policy to buy a house can work in your favor, but you shouldn’t make this decision lightly. There are too many risks to making this decision on your own, so get the help of an insurance professional if you’re unsure.
Some policies also have restrictions on what the loan can be put toward, so bare that in mind and contact your insurance agent if you need to clarify the details.
Differences between life and mortgage life insurance
Both life insurance and mortgage life insurance will help to pay out a cash sum (or the cash value) if you die within the length of your policy and its small print.
The main similarity between these policies is that both can be used to help your loved ones pay off the mortgage after your death.
The main difference between these two policies is that they are designed to have different protection purposes. Some policies help financially protect families if the insured were to die during the policy term, whereas others help their family pay the mortgage should the worst happen.
Everyone’s circumstances are different, so different options are available to suit all needs. You should take time to consider what is available to you.
Life insurance
Life insurance could pay out if you die during the length of the policy. This coverage could be used to pay towards an interest-only mortgage and help protect your family’s lifestyle and everyday living expenses. The premiums and the amount of coverage you choose remain the same unless you alter the details of your policy.
Decreasing life insurance
Decreasing life insurance is intended to help protect a repayment mortgage, so the coverage amount reduces similarly to how a repayment mortgage decreases.
NB: life insurance is not an investment or savings product and has no cash value until a valid claim is made.
Life insurance for homeowners FAQ
The following section will cover the most frequently asked questions about life insurance when buying a house.
Do I need a life insurance policy for a mortgage?
No, you’re not obligated to get life insurance for a mortgage by law, but some lenders may consider it a prerequisite to lending you money for buying your home.
For most homeowners, it makes sense to have financial protection in place. If you’re a property owner, a mortgage is likely to be the largest debt you leave behind, so having a life insurance policy in place can help give you and your loved ones peace of mind.
Do I need a life insurance policy if I don’t have a mortgage?
Life insurance isn’t just for those with a mortgage. If you have other people relying on you financially, it’s worth considering getting life insurance.
While it’s statistically accurate that renters are less likely to purchase life insurance, that doesn’t mean homeowners and those with mortgages shouldn’t consider taking out a policy.
Do I need life insurance if I buy a home with my partner?
When buying a house as a couple, it’s important to consider life insurance. Your mortgage repayments could be calculated based on two salaries when buying a home with your partner.
You should consider if you or your partner died while your mortgage loan was outstanding. Would one of you be able to pay the regular mortgage repayments alone?
It’s not what anyone wants to think about, but life insurance can help you if one of you dies during the length of your policy by paying out a cash sum.
This amount can help pay the remaining mortgage, which is what “mortgage life insurance” usually refers to. One of you can continue living in the home without worrying about the mortgage payments.
Do I need life insurance as a landlord?
If you’re an investor buying a home or want to rent a property you already own, you may want to buy life insurance. This insurance can help you cover the remaining balance if you pass away.
You can increase your life insurance coverage to account for the higher mortgage liability should you refinance your portfolio or investment property.
Note: life insurance is not the same as landlord insurance.
Landlord insurance is coverage intended for the structure of your home (buildings insurance) and your possessions (contents insurance).
Life insurance cost
A wide range of factors will determine the cost of your life insurance policy.
The determining factors include your age and gender, medical history, the state of your health, and the type and amount of coverage you want.
As covered in our guide, term life insurance is cheaper than permanent life insurance but can’t be used against your mortgage.
The following factors define the cost of life insurance:
- The required insured amount
- Personal details such as your age and gender
- Medical history (such as pre-existing conditions, previous medical operations, and whether you’re taking medication at the moment of the application).
The failure to have life insurance can cause unnecessary financial suffering to those left behind, whether you’re buying a home or not.
Pitsas Insurances offer competitive life insurance packages for those wanting to protect their family or loved ones in the event of death. We can help you safeguard your family against paying off outstanding debts and mortgages on their own.
We offer insurance packages suited for every need.
Life insurance quote
Why choose life insurance with Pitsas Insurances?
- Beneficial tax benefits and deductions
- Immediate mortgage payment coverage
- Considerable financial income for your family members
- Coverage of expenses for your children’s education fees
- Save up to 25% and connect the policy with your medical insurance.
For more information about Pitsas Insurances life insurance plans, visit our site.
To get a quote, you can complete the questionnaire.