Using life insurance to help pay a mortgage

Feb 20, 2012

Paying a mortgage with life insurance could work in certain situations.

MarketWatch Realty Q&A recently discussed how a mortage would be affected if a person's grandfather co-signed on a home loan and then passed away before the amount was paid off in full. Lew Sichelman said that the grandchild would still be required to make timely payments on the loan if the grandfather passed away.

Although the loan would not be directly affected, Sichelman said that if the grandfather really wants to help out his grandchild, he could secure a term life insurance policy, designating his grandson as one of his beneficiaries. 

"But here’s a suggestion for Pops: He should consider purchasing term life insurance - or perhaps mortgage life insurance - that would pay off the loan in case of his demise," Sichelman writes. "Since he’s up there in years, this idea might be too expensive. But if not, it could be a great way to protect the kids when he is no longer around to act as their backstop."

Sichelman said in a situation like this, if the grandfather opts for mortgage insurance through the lender instead of through an insurance provider, he should make sure the terms of the agreement state that coverage begins when only one of the co-borrowers die. If the plan requires all borrowers to pass, then it's not going to be very useful.

Walter Updergrave, a CNN Money contributing editor, said in most cases mortgage life insurance doesn't make sense for people. Each situation should be examined carefully, but regular life insurance policies could be more flexible.

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