Protecting Your Family's Lifestyle
So you bought a house and the mortgage and upkeep are a big part of your monthly expenses. But it is your dream house and you and your spouse look forward to raising your children here and maybe planting a garden or put in a koi pond. The school system is just right and the community is just what you wanted. You've got homeowners insurance to protect it from weather, fire and other perils but what happens if the family loses the main breadwinner or even just one of the two incomes making this purchase necessary?
It's not something we want to think about but it is so important that you should take just as much time discussing and planning for the possibility as you did when you were looking at homes. Not planning for the worst case scenario will make a devastating event like the death of a spouse infinitely more painful. With the loss of your income, could your family stay in the home you have chosen in the neighborhood you picked that has the school system you want for your children? It's a tough conversation but it doesn't have to be painful.
I have talked hundreds of people through the purchase of policies that will protect their dream even if one of them doesn't live to see it fulfilled. Quite honestly, most of those conversations end with everyone laughing and relaxed. Nothing lifts the burden of this stress from your mind quite like understanding completely what the need is and being able to layout a plan that everyone understands and can easily implement. Once you can say, "we've got a plan and a way to fund it," you feel like the weight of the world was just lifted from your shoulders.
Now just having a plan is not the end of it, but having a plan and a professional to help you flush out your needs is a huge first step and the most important one. So I'm going to show you what your life insurance agent will help you look at to protect your family's home in the event that you pass prematurely. Then I'll walk you through what other plans to make at the same time so that you can feel confident in your plan and comfortable with the future.
Sometimes people combine the life insurance policies that are meant to protect their mortgage and the policies that protect their family's income but for this blog I'm just going to speak about your home mortgage and how to view the life insurance policies that would protect your family if you lose income that made the purchase possible. So to start with we need to establish the cost of the home and the cost of each partner's lost income so that we can approach this topic with a more critical process.
Take a clean sheet of paper and write "Mortgage Life Calculations" at the top of the page, then put "Initial Mortgage Amount = " under the title and fill it in with the mortgage amount you borrowed from the bank. Then Below that put the number of years left on the loan, so if it is a new 30 year note you would put, "30 Years" below that mortgage amount.
Then below that you will put the first spouse's name and " annual income = " followed by their income for the year, if it is a fluctuating number because of commissions or overtime just use the most common monthly number times 12. Then repeat that with the second spouse. If one of you are a stay at who parent you can use a standard deviation to represent that spouse's contribution to the household income. Child care is the biggest part of that because even if the first spouse makes all the income for the household, that income would be greatly diluted if the stay at home parent were to pass because the child care bill can quickly erode the family funds. The monthly cost of child care in the state of Indiana is between $500 and $1000 per child. So the annual income benefit from the stay at home spouse in a home with 3 children can be as high as $36,000 or as low as $18,000. Other non income figures to think about are repair costs and yard maintenance, but he child care cost is usually the most significant. Figure out the approximate percentage of the total realized income each spouse is responsible for and add that to the end of each line.
Okay so you should have something like this on your sheet of paper.
Mortgage Life Calculations
Initial Mortgage Amount = $250,000 30 Years
Bills annual income = $85,000 (80% of the family income)
Sue's annual income = $24,000 (child care value 20% of the family income)
Monthly house Payment =$1,200
Now you have much of the information needed for this policy. If Bill dies he would want Sue to get enough money to stay in the house. If Sue dies she would want Bill to get enough money to offset the cost of child care so they could stay in the same house.
So at the straight value Bill needs a 30 year term policy on him for $250,000 and Sue needs a 30 policy on her for $240,000 (10 years of childcare). Which is a good strategy and will give you lots of options down the road. Assuming Bill and Sue are both 35 years old and non tobacco users Bill's policy would be about $50 a month and Sue's would be about $40 a month. So for $90 a month you have the full protection throughout the life of the loan.
A different approach is to use a 30 year return of premium policy for both, which will pay out if you die but if you don't, at the end of the term the policy will pay you back all the premiums you paid in. This would cost about $165 monthly for both policies together. So 30 years after you buy the house you would pay it off and then get back about $58,000.
Another option would be to have 20 year Return of Premium policies for the same amount ($250,000 each) this would cost about $185 a month for the same protection but at the end of 20 years you would get back $44,000 and you could pay that on the mortgage, which would shorten length of the loan by 3 and a half years or so. Leaving only 7 years to pay and if you added the money you were spending on premium to the mortgage payment you would shave off another 4 years. So you would have maximum protection for the first 20 years and then a strategy to pay off the loan 7 years early with the same budged amount.
There are other interesting ways to use life insurance to protect your family with regards to your biggest and dearest investment but these are basic ways to approach the issue and even get the payments to come back to you if you don't use the insurance for a loss. Just imagine if you could do that with your homeowners policy, ask your agent if you can get a policy on your house where after 20 years without a fire you get all your premium back. I'm sure they will not be able to keep a straight face when telling you that a return of premium homeowners policy doesn't exist. So take advantage of the unique benefits that life insurance offers.
If you are in Indiana I can assist you in navigating the world of insurance. Either way it is a good idea to talk to a professional and see what products fit your goals, budget and lifestyle.
Thanks for reading, let me know if I can help you.
jasonedwards@shelterinsurance.com
Disclaimer: the figures and assumptions in this illustration are examples and do not reflect everyone's premiums or policies. Insurance cost and policy types are unique for each individual, so the prices and figures quoted here may be higher or lower than these examples. Some people may not qualify for some or all of the insurance products discussed in this blog based on their medical history, age or other factors. The only way to get specific figures is to get a personalized quote from an agent.
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