You can easily use Mortgage Life Insurance to protect your family and Invest in Retirement…
For consumers who are building a family and have invested in their dream home, purchasing Term Life Insurance to pay off the mortgage if a breadwinner dies makes a lot of sense. If you are under 50 and in good health, Term Life insurance is the most affordable product to fund your Mortgage Life Insurance Plan. The last thing you want to happen is for your survivors to lose their dream home because they cannot keep up with the mortgage payments. You know the proper thing to do is to leave enough money behind to pay off that mortgage.
Premium down the Drain?
We hear from many financial advisors that permanent insurance like whole life and universal life is way too expensive and that interested consumers could do much better by investing the difference in premium between term life insurance and permanent insurance. This strategy may or may not work for you because not every consumer is committed to saving for retirement as they should be.
There also individuals and families that need a significant amount of life insurance but cannot afford to purchase whole life or universal life. In these cases, we typically recommend splitting your insurance needs between term insurance and permanent insurance if you can comfortably afford to do so.
But, what if there was a way that you could buy a large amount of term life insurance and lose all of those premium dollars if you outlive your insurance policy? Well, you can.
Return of Premium Mortgage Life Insurance
Many of the highly-rated insurance companies that offer term life insurance for mortgage protection also offer a rider known as the return of premium rider. This rider, when added to your term insurance policy, provides for the insurance company to return the entire premium you’ve paid on your policy if you outlive your policy’s term of coverage.
Using the return of premium rider allows for young families who are accumulating debts like a home mortgage and vehicle loans to purchase enough insurance to cover those debts and get your money back if you outlive the policy term. Here is an example of how the return of premium works:
Jack is a 30-year old healthy non-smoker who is married and has two children. Jack is concerned that if he should die unexpectedly, his family will not be able to continue living in the family home because Jack’s spouse is a stay-at-home mom and works about 20 hours per week as a freelance writer. Jack’s insurance agent recommends the following solution to mitigate Jack’s concern:
Jack has a home mortgage of $300,000 with a 30-year term. Jack purchase mortgage life insurance (term insurance) with a $300,000 death benefit and a 30-year term to match the mortgage. Jack’s total premium for the term insurance with the return of premium rider is only $42.00.
If Jack should die unexpectedly, his spouse would receive the $300,000 death benefit and pay off the mortgage balance and any money left over she can keep. If Jack outlives the 30-year term policy, two really great things would happen:
- Jack’s home is now paid for
- Jack will receive a tax-free lump sum payment from the insurance company for $15,120 that he can use however he wishes.
Invest the Returned Premium in Your Retirement Plan
By now you’ve probably figured out why the mortgage life insurance can become an investment in your retirement, and this is where you will also understand how your monthly premiums for the term policy are significantly lowered over time.
Once you’ve reached the end of the policy term, you will then take the returned premium and invest it in a favorable annuity product that will then pay regular periodic retirement payments for the rest of your life. Since those entire premium dollars were paid using the after-tax money, you can invest 100% of the returned premium which puts all that money back to work for you.
When you are about ten years into your retirement, you will likely have an epiphany of how much value that inexpensive term insurance policy really brought to the table:
- For thirty years, you provided the protection needed to make certain that your loved ones could pay off the mortgage in the event of your death.
- By outliving the term policy, you were able to invest about $15,000 in an annuity that will accumulate interest over time and pay that money back to you during your retirement.
- Although your return of premium did not include interest, the premium was reinvested in an annuity that will earn interest.
- You did not pay taxes on the returned premium or when the premium was returned a second time through the retirement distribution.
Taking these points into consideration, you may conclude that the term Insurance used to protect your mortgage only cost you the amount that was charged for the rider, which was about 40%, of an already very affordable premium.
If you are not a committed saver and are concerned about whether you will leave your surviving loved ones a paid-for home or the burden of a mortgage, mortgage life insurance will likely be the best strategy for your circumstances.
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