If you own a home, chances are you are paying on a mortgage. If you live in a state where home prices are high (like California, as I do), your mortgage payments are probably higher than you’d like. If that’s the case, and you are the breadwinner of the family, it would be a good idea to purchase a life insurance policy to, at the least, cover the mortgage. If you were to pass away, you wouldn’t want your family to lose the home you worked so hard to acquire.
Until a few years ago, many people purchased mortgage insurance, which is usually a reducing term policy, which means the amount of coverage decreases with your mortgage over the length of the mortgage (typically 30 years). As regular level term life insurance premiums became less expensive than decreasing term insurance, the traditional mortgage life insurance fell out of favor.
Most of our clients today purchase a term life insurance policy with a death benefit large enough to pay off the mortgage and other debts, as well as providing income replacement for the insured person, should he/she pass away. Paying off the mortgage is a good start, but other potential costs should be included in the death benefit, such as college expenses for any young children in the household and living expenses for the family for a significant period of time.
When evaluating how much life insurance to purchase, a good rule of thumb is to get 15- 20 times the insured person’s income. Once you have that figure, subtract all the debts, including the mortgage. This is what the family will have left to live on once all the bills are paid. You can then determine if that is the right amount and, if not, add or subtract from that number.
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