Why pay off the mortgage with life insurance?

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KYDoc
Posts: 27
Joined: Sat Dec 06, 2014 8:22 pm

Why pay off the mortgage with life insurance?

Post by KYDoc » Sun Feb 18, 2018 2:13 pm

I am recalculating how much life insurance I may need and I keep running across the assumption that the surviving spouse will pay off the mortgage balance with the life insurance policy. Why? If life insurance is supposed to maintain current standard of living for one's family, then why would they need to pay off the mortgage balance if we are not currently doing that? Not to mention that there are better ways to invest $450,000 than to tie it all up in a mortgage. We are currently living several miles away from both our families and my spouse wouldn't stay here for long if something happened to me. It just doesn't make any sense to me to plan for paying off the mortgage with a life insurance policy. Rather I'm planning on including what a typical mortgage or rent payment would be in my projections for income need. Anything I'm missing here?
KYDoc (now residing in Alaska)

ralph124cf
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Re: Why pay off the mortgage with life insurance?

Post by ralph124cf » Sun Feb 18, 2018 2:23 pm

Paying off the mortgage makes it easier for a family to stay in place. Up till this new tax law, the mortgage interest deduction was quite important, but with much less taxable income, the deduction would be less valuable. It would make sense for a family that has a reduced taxable income, but a pile of cash to pay off the mortgage IF they wanted to stay put.

Ralph

afan
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Re: Why pay off the mortgage with life insurance?

Post by afan » Sun Feb 18, 2018 2:49 pm

Well, even if you don't pay off the mortgage as a lump sum, continuing life as before means making the monthly mortgage payment. Where is the money for that to come from? While you are working it comes from your earned income. That stops when you die. By having enough life insurance you make it possible to keep paying the mortgage, hope that you can generate some income with most of the life insurance death benefit and decide whether to sell the house.

Without that coverage, your spouse would HAVE to sell the house and move out. It would not matter if the market were down. It would not matter if kids were.well established with schools, activities and friends. It would not matter spouse's convenience to work. There would not be enough money to pay the mortgage, so spouse would have to sell and move.

If spouse does move, where would he/she live? Buy a new house? Using what for money? Only the difference between the mortgage balance and selling price? Depending on the price and the mortgage balance that might not buy an acceptable place to live.

If you own two houses, both perfectly good places to live, then the surviving spouse can sell one and live in the other, perhaps using the net proceeds of the sale to make the mortgage payments on the other house. Most people don't have an extra house and still need a place to live. Which means they need money that is no longer coming from the deceased spouse's earned income.

With enough life insurance to pay off the mortgage, one could still sell and invest the proceeds, but would still need a place to live.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Leemiller
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Re: Why pay off the mortgage with life insurance?

Post by Leemiller » Sun Feb 18, 2018 2:51 pm

My husband and I each have a stand-alone policy that would pay off the mortgage and cover at least state school for the kids should something happen to either one of us. We also have insurance at work. While it may be that we’d want to move, I think it’s nice not to have to be forced to move. Especially if something happens when the kids are older.

KYDoc
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Re: Why pay off the mortgage with life insurance?

Post by KYDoc » Sun Feb 18, 2018 3:15 pm

KYDoc wrote:
Sun Feb 18, 2018 2:13 pm
I am recalculating how much life insurance I may need and I keep running across the assumption that the surviving spouse will pay off the mortgage balance with the life insurance policy. Why? If life insurance is supposed to maintain current standard of living for one's family, then why would they need to pay off the mortgage balance if we are not currently doing that? Not to mention that there are better ways to invest $450,000 than to tie it all up in a mortgage. We are currently living several miles away from both our families and my spouse wouldn't stay here for long if something happened to me. It just doesn't make any sense to me to plan for paying off the mortgage with a life insurance policy. Rather I'm planning on including what a typical mortgage or rent payment would be in my projections for income need. Anything I'm missing here?
I meant we live several thousand miles away from our homes, not several miles. 😛
KYDoc (now residing in Alaska)

rob65
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Re: Why pay off the mortgage with life insurance?

Post by rob65 » Sun Feb 18, 2018 3:22 pm

Kids or no kids could change this answer. If there are kids still at home or possible future kids, then my advice is enough life Insurance to pay off the house. I wouldn’t have wanted my kids to have had to move when they were young, especially on top of losing a parent. Now that the kids are through college, it’s a little different; my wife would probably want to sell the house anyway.

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grabiner
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Re: Why pay off the mortgage with life insurance?

Post by grabiner » Sun Feb 18, 2018 10:24 pm

Whether you pay off the mortgage or not, you will need to have money to pay the mortgage. If you make an investment and expect it to make the mortgage payments with little risk (since you have lost the salary which was paying them), you would need about the same amount of money as the mortgage balance.

You may need less than the mortgage balance if the survivor would move to a smaller home; this may not decrease your standard of living since there is a smaller family. If the survivor sells a $400K home with a $200K mortgage, and buys a $300K home, then only $100K of life insurance is needed to allow the new home to be bought for cash.
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