Use of Insurance to Pay off Debts, in Particular a Mortgage


By Nelson J. Rodriguez, MBA
You and your family have worked hard to acquire your home, a rental property or other real estate holdings, and you qualified for that mortgage thanks to your income level, excellent credit rating and financial history.
But what would happen if you — the primary income producer or even as half of a dual-income partnership — suddenly died? Besides the emotional trauma, a surviving spouse may experience a significant decrease in household income that could lead to foreclosure. That’s why many banks and mortgage companies encourage homeowners to purchase mortgage life insurance.
Life Insurance from a Lender vs. an Insurance Company
Basically, you purchase mortgage life insurance so that in the event of an untimely death, funds are available to meet any outstanding mortgage balance. But the type of insurance you purchase can greatly affect your surviving family members’ options.
When you purchase insurance from a bank or mortgage company, you generally lose all ownership control of the insurance. In many cases, you pay the premiums, the lender receives the proceeds at the insured’s death, and your family receives the deed to the house. While this may seem like an equitable solution, the spouse may not want to remain in the home due to several factors:

  • The daily memories may be too difficult to handle.
  • The expenses may be too large to maintain.
  • Your spouse needs to live closer to friends and family.
  • Your spouse needs to relocate for a better job or school area.

With personally owned life insurance, you have more choices and control because your surviving spouse (assuming he/she is the beneficiary) — not the lender — receives the insurance proceeds at your death. Your spouse decides what to do with the money. He/she can pay the mortgage in one lump sum or continue paying it down periodically.
Plus, personally owned life insurance is portable, which means if you move in a few years, you won’t have to replace your insurance, which could be a costly process. Furthermore, even after the mortgage is paid, personally owned life insurance can provide other valuable benefits.
Make a Choice Today
Whether you decide to purchase mortgage life insurance through a bank or personally owned life insurance, the key is to be prepared. There is a real chance that someday one person will be solely responsible for your family’s finances. Taking the necessary steps today can ensure your family’s financial future tomorrow.
This educational third-party article is being provided as a courtesy by Nelson J. Rodriguez, MBA. For additional information on the topic(s) discussed, please contact him at (860) 298-1053. Neither New York Life, nor its agents, provides tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.