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Designing a Mortgage Term Life Policy

Who Should Own Your Mortgage Term Life Policy?

When it's time to fill out your application, you might start wondering whether or not you should own your own mortgage term life insurance policy. After all, you can make your spouse, children, or some other person or trust entity the owner instead of yourself. All these decisions can make estate planning difficult and confusing. While there really is no single right or wrong answer to this question, it is generally a good idea for you to be the owner of your own policy so that you retain the ability to make changes to your policy at any time and not just when the owner agrees with you.

As the insured, you have very few rights. The owner of the policy is the individual who has the ability to change beneficiaries, change payment methods, request changes to the death benefit, surrender the policy and assign ownership to another individual.

If you are the insured only, you can’t make any of the above changes, which could make your policy management more than difficult in the future.

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Beneficiaries, Death Benefit and Your Mortgage Balance

One of the things that you will need to do when taking out your mortgage term life insurance policy is to choose both your primary and contingent beneficiaries. When you decide who to name as your beneficiary, you are deciding who will get to make the decisions about spending the death benefit for your mortgage term life insurance policy, which will probably be a number that is close to your outstanding mortgage amount at the time of application. This makes sense and ensures that even if you pass away your family is totally provided for.

But your mortgage balance is going to decrease over time. Luckily, your mortgage term life insurance death benefit does not have to be used only for your mortgage. Instead, it can be used by your beneficiary in whatever way they see necessary.

Mortgage life insurance policies allow your beneficiaries to decide how to best use the money that you leave them in the way that they know will work best for their lives.

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Choosing the Term of Your Mortgage Term Life Policy

The term you choose for your mortgage term life policy can be as long or as short as you want it to be, as long as it remains within the limits set by the insurance company. This leaves you with many different options for coverage. You can choose a term as long as you plan to have the loan, which may be shorter than your actual mortgage period if you plan to pay it off early. Of course, it is important to remember that this could leave your family exposed to unnecessary risks if you don’t actually succeed in paying it off early. You can also choose a term that is equal to your mortgage term straight out of the gate and, if you do pay it off early, your beneficiaries can use the death benefit for other obligations.

But those aren’t your only two options. You also have the ability to choose a term that exceeds your mortgage term. This can be especially helpful in providing your beneficiaries with much-needed resources after you pass on that you and they were not expecting.

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How Much can My Mortgage Term Insurance Be?

When you take out a mortgage term insurance policy, you can take out an amount that is equal to your mortgage or you can take out a death benefit that exceeds it. Mortgage term insurance policies work like traditional life insurance policies, so you can take out the amount that you think your family will most benefit from—no matter how much that differs from your actual mortgage.

When trying to decide how much to make a death benefit for, you can consider college tuition, debt repayment that extends far past that of your mortgage, salary replacement for the deceased spouse, and any other financial concern that your family will have in the event that you pass away.

Remember, the mortgage term insurance policy is designed to cover the things that concern you the most. This gives you the power and the freedom to provide for your family and gives them the power to decide what is best for the money.

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Mortgage Term Insurance Beneficiaries

You have many choices when picking mortgage term insurance beneficiaries. You can decide to name your mortgage company the beneficiary, although this is a risky move because your mortgage balance might be less than your death benefit amount after your death. If that is the case, it can take some time for the mortgage company to determine the difference and send a refund to your family.

You can name an individual as your beneficiary, and then this individual can determine what to do with the money and allocate it as he or she feels is appropriate. Or you can name a trust the beneficiary, and your trust paperwork will determine what happens to the death benefit after that point.

The important note is that while you have the ability to name your mortgage company the beneficiary of your mortgage term insurance policy, it is not required. This gives your policy some added importance since it makes it such a flexible tool for the people you love.

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Return of Premium Rider

After the term of your mortgage term life insurance policy ends, if benefits were not paid, coverage ceases. You and the insurance company no longer have any contractual obligations and you can each go on to other things. But if you have a return of premium rider, you may have the benefit of getting a full return of the premiums you’ve paid over time.

Some individuals like the idea of getting a return of their mortgage term life insurance premiums after the term is over. While there is no interest paid, the knowledge that they were protected during that time combined with a return of the principal they could have invested instead of used for premiums, is very attractive.

But return of premium riders are not free. They will cost you an additional amount each month and, in some cases, can increase your premium by 100 percent. In addition, they often come with stiff conditions and are void if the policy lapses before the end of the term—even if it is later reinstated.

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Mortgage Term Life Riders

Riders are additional coverages and options you can add to your mortgage term life policy. They can include such important coverages as accidental death benefits, which give your family more death benefit if you die in an accident, return of premium benefits which pay back your premiums at the end of your policy term, and guaranteed insurability during the life of the policy.

A guaranteed insurability rider can be especially helpful to mortgage term life policyholders because it gives you the power to add to the death benefit at pre-determined times during the life of your policy. Because of the guaranteed insurability, you cannot be re-underwritten and denied the ability to add additional insurance benefits.

It is important to note that you will be required to pay additional premiums based on the amount of additional insurance that you take out at the pre-determined intervals. Additionally, if you find that you don’t need the additional coverage, you can decline to increase your death benefit.

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Your Estate as Beneficiary

When you name the beneficiaries for your mortgage term life insurance policy, you may be tempted to name your estate as the primary beneficiary. Unfortunately, this could make it much more difficult for your family after you are gone.

Mortgage term life insurance death benefits can be awarded right to the named beneficiary once the insurance company’s claims department has gone over the claim. They do not need to go through the lengthy process of probate, and that means it is easier for your family to deal with their financial responsibilities after your death.

But when you name your estate the beneficiary of your mortgage term life insurance policy, the proceeds will need to go through probate court and will not be sent quickly to your family, no matter how much they need them.

So keep this in mind as you fill out your application for insurance and be sure to write a definitive beneficiary instead of an estate. If you aren’t comfortable with that, you might consider creating a trust and making it the beneficiary.

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Choosing Level or Decreasing Death Benefits

When taking out your mortgage term insurance policy, you can decide between a level term and a decreasing term policy, as it relates to the amount of your death benefit. If you strictly want your mortgage term policy to help your beneficiaries pay for your mortgage or some other debt that you anticipate will decrease over time, then a decreasing mortgage term insurance policy will probably be a great choice for you. You can also choose to pay a level premium with your decreasing term or a premium that also decreases over time.

If not, then you can always choose the level term policy which gives you a set death benefit that remains consistent for the life of the policy. This method works for individuals who want to give their family’s access to funds that they can use for many different purposes after death. Since there is no restriction preventing mortgage term insurance policy death benefits from being used however a beneficiary sees fit, level terms are a great solution.

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Choosing a Payment Interval

Premium payments are a fact of life when you have a mortgage term life insurance policy. In order to keep your contract with the insurance company intact, you must hold up your end of the agreement—and that means making regular premium payments according to schedule.

You have the ability, when you take out your policy, to decide how frequently you want to make your mortgage life insurance premium payments. Your choices will generally include:

  • Monthly
  • Quarterly
  • Semi-Annually
  • Annually

It is important to note that annual payments will often be rewarded with a discount over monthly payments, because the insurance company has the benefit of retaining and investing your premium over the course of the year when you pay annually.

In addition to choosing the payment intervals, you will also be asked to choose the method of payment. Many insurers now accept automatic premiums drafts right from your bank account during every payment period, which means you never have to worry about remembering to send a check or accidentally lapsing the policy.

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Naming a Contingent Beneficiary

You have the ability to name both primary and contingent beneficiaries when you apply for mortgage term life. Many individuals simply choose a primary beneficiary and leave the contingent blank, assuming that the primary is all they really need to name.

But a primary beneficiary can predecease you, and if he or she does without a contingent beneficiary named your mortgage term life policy death benefit, you will need to go through probate in order to be paid out to your estate. Not only does this make getting your death benefit into the hands of your loved ones more difficult, it also makes it more time consuming. That means that they could be left financially unstable while waiting for the probate court to award the proceeds—after having already waited for the insurance company to make the payment.

Your family will need a fast source of financial security after you are gone, so be sure to name a contingent beneficiary on your policy to ensure that they get it.

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What is the Difference between Mortgage Term Life Insurance and Permanent Insurance?

One of the most important aspects of a mortgage term life insurance policy is its simplicity. When you choose a life insurance policy to cover you temporarily in the event of death while you still owe money on your mortgage, you do not want to deal with the cumbersome and hard to understand options for permanent life insurance policies. These policies often have difficult to understand cash value accumulations, sub account funds to research and select, and other caveats and nuances that just aren’t suitable for temporary insurance coverage.

Mortgage term life insurance policies are simple to understand and totally straight forward. The policyholder makes his or her premium payment when it is due, and the insurance company pays out the death benefit upon death. When the term of the policy ends, no more payments are due and no more death benefit responsibility is present. And that’s it—that is all you really need to know about mortgage term life insurance. It is a simple, straight forward product that doesn’t take a finance degree to understand.

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How Will My Beneficiaries Receive the Death Benefit?

When your mortgage term Insurance is paid out to your beneficiaries, there are many different payout options that they can choose between, including:

  • Lump sum: If your beneficiary chooses a lump sum, they will get a single check with the amount of the death benefit they are entitled to. If you have chosen multiple beneficiaries and assigned percentages of the death benefit to each, then that percentage is the amount they will receive.
  • Interest income: Your beneficiary can choose to have the death benefit remain with the insurance company and agree to have just interest on the death benefit paid out each month.
  • Life income: The insurance company may allow your beneficiary to convert the insurance policy to an annuity and take a set income for life from the annuity. If they choose a straight life annuity, then there is no guaranteed payment period and they may not be permitted to name a beneficiary if they die before the entire death benefit is paid out.

There are just a few of the options facing the beneficiaries of your mortgage term Insurance policy.

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Mortgage Term Life for Businesses

Mortgage term insurance is a flexible product that can be used for many different reasons. While it is most commonly used to provide additional life insurance coverage during times when you have a high amount of debt from the purchase of a home, it can also be used to provide extra coverage for other types of debt including business ownership.

If you have taken out a small business loan, your business can buy a mortgage term insurance policy for you and the death benefit can be used by the business to pay off that debt in the event of your death. In addition, it can be used as part of a buy/ sell agreement if there are multiple owners in the business or as a key person insurance policy.

When looking at mortgage term insurance, be sure to think outside the box in order to utilize this policy for everything you can and to protect your family in more ways than one.

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Converting Your Mortgage Term Life Policy

Some mortgage term life policies allow policyholders to convert their policy into a permanent policy at the end of the term. That means that you could turn the mortgage term life policy you have paid for over the years into a regular, permanent life insurance policy at the end of the term. But note:

1. You will need new underwriting.
Your health may have changed significantly since you were underwritten for your mortgage term life policy. By the time you decide to convert, the insurance company is going to ask you to submit to additional tests and submit additional information to support your current health.

2. Your premium will increase.
Permanent policies are generally more expensive than mortgage term life policies. Add the fact that you are now older than you were when you took out your term policy and that you may be less healthy and you have a recipe for higher premiums. It may end up a better idea to simply take out another term policy.

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Insurance Premiums and Risk

When you are creating your mortgage term life insurance policy, you have little influence over the premium. Your premium is based on your age, weight, death benefit, health, term of the policy and life expectancy based on your health, habits and hobbies. This leaves you very little to adjust in order to lower your premium—other than your death benefit and term.

The amount of your death benefit represents the financial risk the insurance company is signing on for. The higher that risk, the more premium you will be charged. The term of your mortgage term life insurance policy represents the amount of time the insurance company agrees to take this risk that you will pass away and they will need to pay the death benefit. The longer the term is, the more risk the insurance company is exposed to, the higher your premiums are.

Insurance is all about protecting against risk; you are protecting your family against the risk of losing you and the insurance company is protecting its bottom line and other policyholders.

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Renewable Term Insurance

Your mortgage term life insurance death benefit can be renewable or non-renewable depending upon what you elect when applying for the coverage. A renewable mortgage term life policy allows you to add more years to the contract at the end of the term without going through underwriting again. This can be very valuable because as you age, you may find that your health circumstances change and make you less insurable than you were when you initially took out the mortgage term life policy. If this is the case, and you didn’t reduce your debt as much as you planned to, then you could be in trouble since your health might make a new policy impossible to get or, at least, cost prohibitive.

A renewable mortgage term life contract may be more expensive than a non-renewable. In addition, there may be certain stipulations that invalidate the renewability, such as renewing my a certain date, ensuring that the policy is not lapsed prior to renewal, and a prepayment f premium.

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Choosing Insurers by Rating

While you are applying for mortgage term insurance, remember to check the A.M. Best rating of each of the companies you get quotes from. A.M. Best is charged with the task of evaluating insurers' financial standings and ensuring that they are stable enough to actually pay out the claims they obligate themselves to.

A.M. Best assigns letter grades to insurers after going through various financial statements and other documents. This helps A. M. Best determine how prepared the insurer is to pay out the claims that actuarial data expects them to pay out and helps keep insurance companies in check and accountable for their financial behavior.

An insurance policy is only worth the paper it is printed on if the insurer that issued it can back up their promise and actually pay claims. If your insurer can’t pay a death benefit to your beneficiaries upon your death, then it isn’t doing its job properly. When you use A.M. Best to narrow down your insurer selections to companies that can back up their promise, you are doing your family a great service.

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Determining Your Death Benefit

Deciding on a death benefit for your mortgage term insurance policy can be challenging. Here are three ways to look at it:

  1. Your mortgage amount: Your death benefit can simply be the amount you owe on your mortgage at the time you take out the policy. This amount is likely to go down over the years, so if you die further into the term, your beneficiaries will receive funds that can be used for other purposes.
  2. Mortgage and income replacement: If you are a wage earning spouse, then your surviving spouse may need to replace your income for a few years in addition to needing to pay off the mortgage. This will allow him or her to remain living where you are and ensure that h or she can still save for college tuition, retirement and pay off debt.
  3. Future financial goals: If you and your spouse have defined your future financial goals, then you can use your mortgage term insurance policy to make sure that the surviving spouse has these goals met in the event of your death.

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Trusts and Life Insurance

If you are concerned about spelling out the specific conditions of how the death benefit proceeds of your mortgage term life insurance policy are distributed, then you might want to consider creating a trust and making the trust the owner and/ or beneficiary of the policy. Then, you can design your trust document to spell out all of these details and you can ensure that you have some control over the funds.

Trusts can be both revocable and irrevocable and it is important to understand the differences before you choose. A revocable trust is one that can be changed. It will allow you to serve as trustee and gives you the freedom to make changes to the mortgage term life insurance policy should you choose to.

An irrevocable trust can not only never be changed, it must have a third party trustee appointed to it. When you gift your mortgage term life insurance policy to an irrevocable trust, not only do you lose control (except that the payouts will be made as you specified in the trust document), but you can never get it back.

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Granting Power without Ownership

When you take out your mortgage term life insurance policy, whoever you name as owner will be the only individual who can call the insurance company and talk about the policy and will be the only individual who can make changes to the policy.

If you want to give another person permission to manage the policy, then you must notify the insurance company. Generally, insurers will ask for durable Power of Attorney paperwork to be sent to them. A durable power of attorney is one who can take control of your financial accounts and execute order on them before you are incapacitated.

Some insurers have internal forms that accomplish the same authority granting, so you will need to find out what your individual insurer prefers before you send your application in.

It is also important to remember that power of attorney privileges cease upon death, so notify the individual that you plan to make power of attorney that they will no longer be able to make changes to your mortgage term life policy once you are deceased.

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