Mortgage protection is a major component of a life insurance needs analysis. By no means is it the primary reason for acquiring or keeping a life insurance policy. There are several other components of a life insurance needs analysis and benefits of life insurance. Most people are either in retirement or near to it when they pay off their mortgages. At this point, it is usually recommended that they reassess their life insurance needs due to the change in circumstances. However, life insurance maintains an important role in financial planning at any stage of life. The following are cogent reasons for maintaining your life cover after a mortgage payoff:
1)Immediate cash needs
These are expenses that must be paid immediately on the death of the insured. The most common is funeral expenses. Funeral expenses are important but are often given too much prominence. The consequences of other immediate expenses are often much more severe. Other immediate expenses that must be considered include credit card debts, other loans, legal and executor fees, education trusts and emergency funds. Coverage of any medical expenses incurred before death is yet another vital reason to maintain life insurance.
2)Income protection for spouse or children
You could still have a responsibility to your spouse or children at the time you pay off your mortgage. In the event that you are a major contributor to household income, the responsibility would be even more acute. Having people depend on your income is arguably the most important motivation to acquire or maintain life insurance. How would your loved ones survive without you? They may have to mortgage or sell the house you just paid the mortgage balance on. Without life insurance, you may leave your dependents in a worse position and without accommodation.
Life insurance both creates and preserves an estate. Not everyone is concerned with the transfer of estate. Those who are would find life insurance a necessary tool, especially in the later years. The sum assured on a life policy creates an estate that is transferable tax-free. In many cases, the coverage can be used to mitigate the effect of burdensome estate taxes on the rest of an estate.
4)Other benefits contained within the life insurance plan
Sometimes life insurance plans contain long-term care insurance or critical illness benefits. There are also accelerated death benefits and critical illness benefits that allow for payment of those expenses if they arise. Plans with these supplementary benefits are valuable way beyond the life insurance component.
If you had a term insurance plan covering your mortgage needs, it may be unnecessary to continue it if you already have permanent life insurance. This is completely different from suggesting that the entire concept of life insurance is unnecessary. If you had no other form of protection than your term plan, you should convert it to permanent insurance if possible. Should you have permanent life insurance, you can reduce the coverage amount in some cases or use the cash value to purchase a reduced paid-up plan.
Reassessment of life insurance plans is necessary when changes occur. As we age, life insurance plays less of an income protection role and has an even greater bearing on estate planning needs. Paying off your mortgage would certainly precipitate another life insurance needs analysis. However, it may not be necessary to stop your life insurance plan or even reduce your coverage because of this event.