Tapping Life Insurance to Pay Your Mortgage
For many people their home is their largest investment. Second to that investment many people often times have life insurance. These days most people that have life insurance have it in the form of Term insurance. This means they pay a monthly, quarterly or yearly rate for life insurance. If they pass away, a sum will be paid to their heirs. However, there is no cash value to this policy. If they stop paying the coverage stops and they are out all the money they paid in over the years.
There are several other forms of life insurance such as whole life insurance that essentially builds up a cash value to the policy. These policies can be borrowed against. As many Americans are facing foreclosure, some people are turning to life insurance like IRAs and 401ks as a source of money to pay their mortgage. This can serve to protect their largest investment (their home) in the short run, but if there is no end in sight then it could be a bad move. Depending on your state, your life insurance, even your retirement could be protected under bankruptcy laws (consider OJ protected his retirement from his former in-laws through Florida’s protective bankruptcy legislation). However, if you borrow on your life insurance to pay your mortgage payments and still go bankrupt then you could end up with out a house and without life insurance too!
The same thing goes for IRA’s or 401ks. It can also apply to people considering the possibility of tapping their savings or life insurance to come up with a down payment. This is just as risky, but these people are presumably not so close to bankruptcy and buying into a market at current levels could make a good return on their money . . . IF the market has bottomed out!
