Home ownership. A great concept that can bring with it feelings of empowerment, community responsibility and perhaps more than a little anxiety. As with anything, we have to take the good with bad. Are you and your clients prepared for the bad?

In the last issue of Agent Magazine, we talked about the possibility of earthquakes and other threats to the home. To further that discussion, it is vital for us to explore other pitfalls in home ownership that are often overlooked.

Have you ever discussed, either with your family or with a potential buyer/client, how they would pay to keep the home in the family if they were to die unexpectedly? If your answer is no, you are not alone. All too often, the excitement of home ownership or the busyness of the daily grind keeps most people from ever considering this important question. Alternatively, I’ve been asked by a client, “Since only one name is on the mortgage, we won’t have to pay it if that person dies, right?” While this was a well-intended question, the answer, of course, is that someone will be paying the mortgage. Or everyone will likely be leaving the home. So, how do we avoid the potential eviction, foreclosure and/or short sale?

Very few families have the assets on hand to pay off a mortgage if the primary breadwinner passes. Even in dual income families, the death of one breadwinner can leave a serious void in family finances. The questions in the preceding paragraphs and possible scenarios lead to the obvious answer: Life Insurance. But wait! Don’t stop reading – what kind of life insurance? We talked about the various disability policy options in the January/February issue of Agent Magazine and how these options can cover expenses in the event of illness or injury. In the case of life insurance, there are also a couple of very different options that can be equally appropriate, depending on the desires of the family. The first type of life insurance available is term insurance. This is a great option and generally the much easier understood choice for what we call “Mortgage Protection.”

Term insurance is, as the name implies, life insurance that covers a selected duration or “term.” During this time period, the policy will guarantee a chosen death benefit (i.e., an amount large enough to cover the mortgage) at a given cost or premium. Term policies will vary in duration, usually between 5 and 30 years.

Some companies offer layered protection to lower the death benefit as time goes on; diminishing with the mortgage balance and lessening the price along the way. If you die within the time frame of the term policy, the insurance company will pay the chosen death benefit to your beneficiary. If you outlast the length of the term policy, the policy will usually end and hopefully, so does the need for the coverage. This simple type of policy can provide the financial means and peace of mind for the family left behind to remain in their home.

A second type of life insurance policy is one that, as I like to say, “lasts as long as you do.” I’m, of course, talking about permanent life insurance such as Universal Life and Whole Life policies. These types of policies offer a cash value component and can be guaranteed to last well past age 100. Unlike the term policies mentioned above, these permanent policies often offer competitive rates of return and flexible payment plans. If set up correctly, you could, at some point in the future, 20 years perhaps, use the cash value of the policy to pay off the mortgage. Or take loans against the policy to cover home improvements. Whatever you chose to do with the cash balance, as long as the policy is in force, it can provide the mortgage protection that is the focus of this column.

As a bit of a sidebar, I want to highlight that there are potential benefits of life insurance policies that don’t require you to die to take advantage of the policy. Many companies offer what is known as an “accelerated death benefit.” An accelerated death benefit is a feature that allows the policy holder to receive a cash advance on the death benefit in the event of being diagnosed terminally ill. An example of this benefit is that you can draw up to 80% of the death benefit, up to a certain dollar amount to take a family trip, pay for experimental medical care or pay off a mortgage prior to your passing.

Simply having the assets to pay off a mortgage to save the family home would be a great place for all of us to be. If those assets are not immediately available to your family, perhaps a life insurance plan is in order. Remind your clients or yourself to call your insurance person and protect the castle… and the family.