When to Buy Life Insurance: Buying a House
When you are ready to buy your first home you may be overwhelmed by all the paperwork. You need to consider your contract price, points, interest rate, type of loan, commission, closing costs, taxes, property insurance, and any number of other details. Another item on your list should be adequate life insurance. In fact, your lender may require it.
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Why do you need life insurance if you buy a house?
There are several reasons why it is important to have a life insurance policy if you purchase a home:
- If you are purchasing a house with a down payment that is less than twenty percent of the purchase price, the lender will require that you have a policy called a PMI or Private Mortgage Insurance policy. This type of policy protects the lender in case you were to default on the loan for any reason, including your death. Once the loan balance is paid down below 78 percent of the purchase price, this type of insurance is usually dropped.
- If you agree to a mortgage life insurance policy, the lender may lend you money to purchase a more expensive home for a better rate than you would otherwise receive based on your income and available down payment.
- If you have a family who lives in the house with you, you should consider carrying enough life insurance to cover the cost of the mortgage on the house. That way, your survivors would be able to stay in the house more easily, in the case of your death. This consideration is important either if you have children and a spouse who stays home to care for them or are in a two-earner family. The loss of your income could mean loss of the house and all you have invested in it.
- Either a term life insurance policy or a mortgage life insurance policy can cover your mortgage payments for the duration of your loan. Savings, whole life policies or other investments can help survivors with other expenses while those investments build principal for your later years. Term insurance that covers a finite time in your life offers protection for that time, is relatively inexpensive, and can be dropped when no longer needed.
Each time you purchase a new house, you should review your insurance in order to bring it up to date. Make sure your coverage will be adequate and will protect your investment.
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