Using Life Insurance Coverage to Pay Off a Mortgage

The first reason you purchased your life insurance plan was to obtain protection in the event of your family suffering your loss. But, there are some policies such as whole life insurance or universal life insurance policies that can offer you the benefit of using the cash value these types of plans build over time if you have good heart health. One such use may be to pay for a child's college education. Another may be to place a significant down payment on the purchase of a home.

But, what if you want to make use of the cash value your policy has built up, and you wish to use that cash to pay off your mortgage? You may wonder if that is even possible. It may not be if the value in the policy is currently not sufficient to cover the remainder of your mortgage loan. Even if the balance you would like to pay off is $10,000.00, if there is $12,000.00 left on the policy in cash you need to take into consideration the impact the loan would have.

Thinking about Borrowing against Coverage

First of all, many policies will incur interest against any monies borrowed. So, in the example above, it might be that your policy simply does not have enough money to pay what you thought was a rather nominal amount off. In addition, there are usually administrative fees associated with your plan and these fees would continue to accrue. You also could not borrow more than is available over the amount of money in the policy to provide for the beneficiaries.

Most policy owners do not buy life insurance as investment tools in and of themselves. It is important to weigh all the pros and cons of borrowing against your policy before you do so. The loan you take against your policy to pay off the mortgage probably should be one that comes at a lower interest rate. Otherwise, it may be best to continue paying your mortgage payment and know that once the loan is paid off you have value in your home.

The value of your home, or its equity, would then be able to be combined in time with the value of cash built up in your life insurance policy. If you were to pay of the mortgage with the policy loan, the equity in your home would be readily available yet you would have incurred possible fees, interest and tax consequences by borrowing from the policy, too. One other option you have is to consider ahead of purchasing life insurance what to do about any existing mortgage loan amount on your home.

Sometimes simply obtaining coverage for your family to cover paying off the mortgage in the event of your death is the best option. You could purchase enough coverage even with a term life insurance plan to pay off the mortgage on the home after your death. This can keep your family from having to face any significantly difficult financial circumstances and still provide for them in other ways for which your insurance coverage was purchased.

If you do choose to do so, using life insurance coverage to pay off a mortgage is something you will want to think about seriously. You may wish to discuss the issue with your accountant or life insurance agent. They can help you understand any fees or taxes involved ahead of time so that you can determine whether or not you and your family would truly benefit financially from borrowing against your life insurance plan.

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