In many cases, this is unnecessary. Term life insurance in amounts more than sufficient to pay off a home or replace most of a breadwinner's income is more affordable now than it has been in generations. But too many American families simply don't have enough life insurance protection to enable them to remain in their homes in the event the unthinkable happens.
While about 60 percent of Americans report owning life insurance of some kind, half of American families do not have anywhere near the coverage required to meet the needs of their families, according to a recent survey by Bankrate.
Families with children at home are especially at risk. Over a third of those households report having no life insurance in place at all. Another third has $100,000 or less - enough to replace two to four years of a middle-class breadwinner's income, at best. That amount is almost certainly not enough to cover the need of a young family unless they were already wealthy.
Without adequate life insurance in place, the financial problems don't end with life insurance. Many families have serious trouble meeting basic expenses after a loved one dies:
- Car payments and car insurance
- Amassing first and last month's rent to get an apartment
- Burial costs
- Medical and disability insurance premiums
- Medical insurance deductibles and copays
- Child care costs
- Private school tuition
- College savings
- School supplies
- …and much more.
With life insurance in place, survivors have choices: They can pay off the mortgage with a tax-free death benefit in a matter of days, if they choose. Or they can save or invest the death benefit and continue to make the mortgage payments to continue to take advantage of the mortgage interest deduction.
If the deceased was your spouse, and the mortgage is in his or her name, you have the option to simply alert the mortgage holder that the original borrower has passed away, and you may keep the mortgage as long as you can make the payments. If the mortgage is in the name of the deceased individual who is not a spouse, lender often has the ability to call the loan - that is, demand immediate payment, or foreclose on the home under a 'due-on-sale' clause in the mortgage contract. However, if a widow or widower is making payments on the loan, this would be highly unusual.
With enough life insurance in place, though, this is not an immediate crisis, since the survivors would have enough resources to purchase the home outright or could easily qualify for a new mortgage.
If you don't have life insurance in place, or the amount is not sufficient to cover your mortgage, there are some alternatives that may help:
1.) Reverse mortgages. If you are age 62 or older, and you have some equity in your home, you may be able to qualify for a reverse mortgage. In this arrangement, a lender converts your home equity to income, and pays you a monthly amount for as long as you remain in your home. The income is based on your life expectancy.
2.) Retirement fund distributions. Normally, you must pay a 10 percent early withdrawal penalty, plus any taxes due, if you tap an IRA before you are age 59½. But the law allows you to make early withdrawals penalty-free in the event you must make the withdrawal to avoid foreclosure or eviction, or to pay health insurance premiums.
3.) Invest personal savings for more income. If you have some savings, speak with your annuity or investment advisor. You may be able to position your assets to generate some more income.
Most of the time, these are stopgap measures. They do not take the place of a well thought out and resourced risk management and insurance protection strategy for younger families, nor can they replace the failure to save money in advance in the event the surviving family member is older.
Every case is different. But if you are currently underinsured, or you believe your home would be at risk in the event of the death of a breadwinner, today's the day to begin laying the groundwork for ensuring your family is adequately protected. Please call us at 314-351-HALO (4256)