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Financial Planning

Mortgages and Behavioral Finance

Rich Oswald

Why It Matters:

  • In the midst of a recession, your clients need solutions that provide financial confidence.

  • Mortgage protection may provide stability in uncertain times.

  • Term life insurance is a flexible, low-cost, effective option.

Uncertainty. If 2020 could be summed up in one word, that would be it. From riding the repercussions of the global COVID-19 pandemic to trying to regain some semblance of “normal,” your clients are looking for tried and true ways to protect their well-being — and ensure a viable future.

For a lot of families, their house is their financial safe haven. But what happens when they’re faced with the unexpected, like a job loss or death? By taking into account the emotional decision-making and the behavioral finances related to mortgages, including mortgage protection from term life insurance, you can give your clients the solutions they need to protect their families no matter what uncertainties they face.

Is now a good time to buy a house?

It depends. With mortgage rates at historic lows, it’s the perfect opportunity to buy and get more house with less payment than before. On the flip side, there’s also a slower housing market. While lower rates make more expensive homes available at a lower monthly payment, they also effectively reduce the number of homes for sale overall, increasing competition for buyers.1 To compound matters, Americans carried more housing debt in 2019 than they did in 2018,2 so not selling and refinancing is a popular alternative as well.

Since they don’t have a house to sell or refinance, this does seem to be the ideal window for first-time homebuyers to take the plunge, especially if they’re Millennials. Even though they represent just 15% of US mortgage holders, the number of Millennials with a mortgage has increased 76% in the past five years.2 Being unfettered, it’s probably too attractive an opportunity to pass up jumping into the current market for the growing Millennial homebuyer demographic. But it’s important that they approach the process with their eyes wide open.

Buying versus saving

Whether it’s existing homeowners looking to capitalize on the lower-than-ever rates or first-time homebuyers wanting to test the waters, your clients’ course of action ultimately depends on their appetite for risk — and their willingness to adhere to conventional wisdom.

The associated uncertainty should dictate it’s wise to avoid putting all their money into homeownership (and the requisite 20% down) and instead save that money to safeguard against possible unemployment. The number of foreclosures rises dramatically during recession, with an estimated 10 million homes foreclosed between 2006 and 2016,3 so renting is probably a safer option than trying to become a homeowner during this time.

In the quest to find the cash for a home purchase, it might be tempting to withdraw money from a 401(k), but there are numerous downsides, including paying interest on the loan, paying income tax on the money, and substantial early withdrawal penalties. Choosing not to meddle with long-term savings makes the most financial sense.

Protection options for buyers

If your clients do decide to buy, they need to know about available options that can protect their mortgage should anything unexpected happen, like unemployment, disability, or death. Here’s why your clients should consider either mortgage protection insurance or term life insurance as protection options.

Mortgage protection life insurance works just like a regular insurance policy: clients buy a policy, pay regular premiums and, if the policyholder dies during the term, it pays a death benefit. However, there are some key differences your clients should be aware of.

One, unlike a traditional life insurance policy, the death benefit of a mortgage protection policy goes directly to the mortgage company or lender, not the policyholder. Two, the total death benefit is designed to decrease year after year as the mortgage is paid down. And three, mortgage protection insurance tends to be more expensive than a comparable term life insurance policy — typically more than double the cost.4 Due to its limited scope and high cost, mortgage protection insurance should be considered a last resort.

Term life insurance is low cost and gives policyholders the flexibility to use its benefits any way they wish — and they can set their own benefit amount. In a payout event, term life insurance provides beneficiaries with a tax-free lump sum of cash (annuities are also available) that can be used for mortgage repayment, retirement savings, college savings, or day-to-day bills.

It’s important you help your clients get this protection now. Premiums are lower when someone is younger (older ages mean higher premiums) and healthier (better risk class means lower premiums). And today, there are more options for non-medical underwriting for term, so the underwriting process is faster and easier to obtain. For example, if your client budgeted a certain amount for a new home payment and the housing prices and interest rates are now lower, that client may have a house payment that is lower than originally budgeted and could use some of the difference to cover a monthly premium on a term life insurance policy.

In addition to the standard term life policy, your clients can also supplement that coverage with living benefits and a monthly disability income rider. Living benefits can help your clients pay their mortgage while they’re still alive by replacing income and covering added expenses should they experience a qualifying chronic, critical, or terminal illness. And a monthly disability income rider provides a monthly income if your clients are unable to work due to injury.

With solid options like these in hand, your clients can approach their future with confidence, knowing they’re covered in the face of any situation.

Things to Consider:

  • Educate your clients on the risk of carrying a mortgage right now.
  • Let them know there are options that can protect their mortgage and quality of life.
  • When it comes to coverage, term life insurance provides the most bang for your clients’ buck.

1 “How Do Lower Mortgage Rates Affect Your Buying Power?”, NYTimes.com, April 2020

2 “6 Mortgage and Credit Statistics You Need to Know in 2020”, Fool.com, Jan. 2020

3 “Will coronavirus-induced foreclosures hit Great Recession levels?”, Housingwire.com, April 2020

4 “Mortgage Protection Life Insurance”, Policygenius.com, August 2019

Neither Transamerica nor its agents or representatives may provide tax or legal advice.  Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal professionals regarding their particular situation and the concepts presented herein.

Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker-dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.