Term life insurance is used for a variety of different reasons. At its core, however, it offers inexpensive coverage in the event of the unthinkable, providing your clients’ families and businesses with a large payout for a specified duration. These durations are most commonly 10, 15, 20, 25, and 30 years. Those durations, coincidently, also correspond with common loan amounts people would use for either their mortgage payments or their small business loans. Let’s explore a creative and cost-effective way to help your client pay off their house in full should anything happen to them during the course of their mortgage agreement. Let’s take a look at term life layering.
Simple Term Insurance to Protect Your Client’s Home
Mortgage loans are often either 15 or 30-year notes. Mortgage protection insurance (not to be confused with primary mortgage insurance, or PMI, which is often required by the lender in case of default on the loan) is voluntary and covers the outstanding mortgage amount in the event that the homeowner dies.
What would happen if the primary wage earner died and the spouse suddenly had a mortgage payment due next month without the additional income? In today’s hot real estate market, the spouse could probably sell the home quickly and take the equity in the home to live off of for a while, but is this the best option? What happens in the future when the real estate market cools and it takes 6 months to sell the home? Will that spouse and the kids get evicted after a foreclosure? These are the types of questions that your client might not think to ask themselves. This is why they look to you for guidance and consultation. Fortunately, for the savvy broker, there is an intelligent way to layer term life so that addresses these concerns in an equitable way.
In the most obvious approach to solve these various crises, a client with a 15-year mortgage on a $500,000 home that they already put $200,000 down on, could use term life insurance to protect the remaining $300,000 balance by purchasing a 15-year term insurance policy for that amount. This way, should something happen to your client during the mortgage term, the death benefit would allow their spouse to pay off the house, not disrupt the kid’s daily lives any more than is already happening, and provide the breathing room necessary to make it through this difficult time.
Layering Term Life: Protect Your Client’s Mortgage Without Mortgaging Their Pocketbook
Layering (sometimes referred to as laddering) is accomplished by utilizing multiple term insurance policies, with various durations, to cover the mortgage loan. If your client took out a $300,000 mortgage, as in the example above, they would be paying down the mortgage over time. In this case let’s say the mortgage was a 30-year mortgage, instead of a 15-year. As they’re paying down the principal on the loan, they don’t need as much insurance in year 20 as they did in year 5 because they’ve been paying down the loan for an additional 15 years. So…they need to get three insurance policies: a $100,000 10 year, a $100,000 15 year, and a $100,000 30 year term life insurance policy that adds up to the same $300,000 in coverage on day one. Here’s where the math gets fun and where we can really save some money while protecting our clients. If a reasonably healthy, but slightly overweight, 45-year-old man buys a 30 year, $300,000 term policy to cover his $300,000 30 year mortgage, it will cost him about $1150 per year, or about $100 per month. If he were to instead layer the 10, 20, and 30 years, $100,000 policies, it would cost a total of $980 per year, or just over $80 per month. That’s almost a 20% savings each month! And it doesn’t end there!
Term Layering Presents a Tremendous Savings Over Time
Since mortgages are paid out over time, your client doesn’t need $300,000 in coverage in year 15, as they have already paid some of that down. By layering term policies, not only do you save them on the monthly cost of the insurance, but, in the example, we’ve used here, after each 10 year period, one of the term policies drops off, and they no longer need to pay for those, again lowering their monthly cost. In the first 10 years, they need all three policies in place, but after year 10, the 10-year term insurance policy drops off, lowering their monthly payment on the two remaining (20 and 30-year terms) to about $780 per year. And, 10 years after that, the second policy drops off, leaving them only with the remaining 30-year policy (which at this point still has 10 years to go), and again lowers their monthly payment to under $500 per year! Take the total premiums for 3, $100,000 policies that we layered and the total over 30 years would be about $22,500. A more than 35% savings compared to paying for a $300,000 30 year term!
Let’s check out some actual numbers to drive the point ‘home’.
Layered Premium Schedule for Male, age 45 Standard Non-tobacco
Year 10-Year/$100,000 20-Year/$100,000 30-Year/$100,000 Total Premium 30-Year/$300,000
Annual Premium Annual Premium Annual Premium Annual Premium Annual Premium
1 $198.92 $290.51 $487.88 $977.31 $1,158.02
2 $198.92 $290.51 $487.88 $977.31 $1,158.02
3 $198.92 $290.51 $487.88 $977.31 $1,158.02
4 $198.92 $290.51 $487.88 $977.31 $1,158.02
5 $198.92 $290.51 $487.88 $977.31 $1,158.02
6 $198.92 $290.51 $487.88 $977.31 $1,158.02
7 $198.92 $290.51 $487.88 $977.31 $1,158.02
8 $198.92 $290.51 $487.88 $977.31 $1,158.02
9 $198.92 $290.51 $487.88 $977.31 $1,158.02
10 $198.92 $290.51 $487.88 $977.31 $1,158.02
11 $290.51 $487.88 $778.39 $1,158.02
12 $290.51 $487.88 $778.39 $1,158.02
13 $290.51 $487.88 $778.39 $1,158.02
14 $290.51 $487.88 $778.39 $1,158.02
15 $290.51 $487.88 $778.39 $1,158.02
16 $290.51 $487.88 $778.39 $1,158.02
17 $290.51 $487.88 $778.39 $1,158.02
18 $290.51 $487.88 $778.39 $1,158.02
19 $290.51 $487.88 $778.39 $1,158.02
20 $290.51 $487.88 $778.39 $1,158.02
21 $487.88 $487.88 $1,158.02
22 $487.88 $487.88 $1,158.02
23 $487.88 $487.88 $1,158.02
24 $487.88 $487.88 $1,158.02
25 $487.88 $487.88 $1,158.02
26 $487.88 $487.88 $1,158.02
27 $487.88 $487.88 $1,158.02
28 $487.88 $487.88 $1,158.02
29 $487.88 $487.88 $1,158.02
30 $487.88 $487.88 $1,158.02
Total Premium Paid $1,989.20 $5,810.20 $14,636.40 $22,435.80 $34,740.60
Term Layering is a Strategy with Wider Applications
I used mortgages as an example here because the term durations offered by the insurance companies align well with mortgage loans. This strategy of layering can be used to fit many financial plans and objectives. Essentially any time-based asset that requires protection can be handled well and affordably with layered term policies. Your clients count on your expertise to help them protect their families and their assets. Thinking outside the box can reveal new strategies that save them money while still offering the peace of mind they need. It is always worth taking a look at how to use any insurance product to make sure that they get the most out of their coverage. Insurance products aren’t one-use propositions. Depending on the carrier, the budget, and the need, there are many ways to use any product to best fulfill the goals of your valued clients. Feel free to reach out to Rocky Mountain to see how you can provide the best possible opportunities for your client.