Mortgage Protection: When A Will Is Not Enough
Nobody wants to think about death, not going to lie it’s kind of depressing. Unfortunately it’s inevitable, death is something we will all face at some point in our lives; for some it may happen sooner than expected. This is why planning for the worst and hoping for the best is a strategy we should all embrace.
When that day arrives we want to make sure that we protect our loved ones, and shield our assets from the government; I think everyone would prefer that our family benefit from our hard work and achievements and not Uncle Sam. Granted in some states Uncle Sam gets a cut of your families inheritance through death taxes, some don’t. Regardless where you live you will want to make sure they get the smallest cut of the pie.
There are a few tools we can utilize to accomplish this. One being a Trust and the other being a Last Will in Testament. I want to make sure you understand that these two products are completely different and protect you in different ways. A Trust is a document that you put all your assets into, liquid, investments, and fixed assets. Fixed assets are your house, car, boats etc. Liquid assets is money in your bank account, social security and things of this nature. Investments are savings tied up in annuities, mutual funds, IRA and stocks & bonds.
A Trust takes your property and creates an estate. A Trust names a Trustee who is responsible for the property contained inside. A Trustee will release the property according to the will, for instance $50,000.00 was left to a child who is 12 years old. They can get the trust when they turn 18 years old, but may draw up to $500.00 a month if the parent/guardian allows it. The Trustee would issue that check to the child each month or when requested.
A Last Will In Testimony is your wishes put on paper as to where the property is dealt. For instance, Jane passes away, and inside her Will she states that her eldest son will get the BMW and her youngest son will inherit the boat. Both children will inherit the house. Upon receiving the house should they decide to sell the property each child will take half the proceeds when it’s sold.
Here’s the issue with property like cars and houses and recreational vehicles; there is usually a loan or mortgage attached to the item. Just because someone passes away doesn’t mean that the property is now free and clear. The payments still need to be made. This is where the trust will continue to make those payments until the loan is either paid in full or the property is dealt to the rightful recipient. The problem is, if that property is dealt and the loan exists, that burden falls on the recipient to pay it off. This is where insurance can help.
For something like a car life insurance is fine. You can incorporate the balance into the benefit amount and still add more for other things you need. Houses are going to be a little bit more expensive. This is where Mortgage Protection comes into play.
When you buy your house, until the loan acquires 20% equity the mortgage lending bank takes out a policy – which you pay for – that’s also mortgage protection. The policy is set for the total amount owed to the bank. Each month that amount drops in value until that 20% is acquired. The reason the benefit amount drops is due to a law that says a bank can’t make a profit off insurance. They can only receive what money is still owed. Unfortunately if you were to pass, this money goes to the bank.
Having your own policy insures that your mortgage will be paid off upon your passing. The benefit goes directly to the trust or the individual who was willed the house for them to pay off the loan. The benefit doesn’t decrease over time because unlike the bank, you can make a profit. You can will that the remaining balance of that amount must be used for renovations or you can will the difference to other family members for their benefit. The primary purpose is that the mortgage is paid in full.
The only time this will not become a benefit for the purpose it was written, is if the deceased individual took out a reverse mortgage. At the time of their death, the property is given to the lender per the agreement of not having to pay the loan back. The only other issue you may have is if the property is to be surrendered because it secured a debt; the mortgage protection can still grant the individual ownership if it covers the mortgage loan and the collateral of the debt if not paid in full.
To put that into a perspective the house was $250,000.00 and 10 years later the amount owed is now $189,000.00. The owner took out a secured loan for $30,000.00 using the house as collateral. Upon their death, the $250,000.00 mortgage protection paid out. The outstanding debt on the secured loan and mortgage is $210,000.00. The amount of the policy covers the total mortgage and secured loan, but it only leaves 40,000.00 left over to be split or used as the will states as opposed to $61,000 if the secured loan didn’t exist.
If you own a home, purchasing mortgage protection is an important investment to be sure your final wishes are fulfilled and the individual won’t have to sell because of the existing mortgage. Your family can continue to live there mortgage free for generations to come.
