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If you’re thinking about becoming a first-time home buyer you may have not thought a whole lot about life insurance. While that’s fairly normal, it’s important to educate yourself on the basics before you start the mortgage process.

This is especially true if you’re house hunting in an expensive market and working in contract positions. You’ll want to obtain a policy that covers death, illness or injury. The higher the housing costs, the more pressure home owners are feeling to obtain proper insurance coverage, and understandably so. You simply can’t afford the risk of not having it, even if you have an extremely healthy savings account.

So how do you know where to start? There are a plethora of companies and different kinds of policies out there, and the whole process may seem overwhelming.

People with full-time jobs will sometimes receive automatic life insurance benefits with decent coverage from a pre-selected company. But many people work temporary or contract jobs, or are self-employed and therefore have no such benefits.

Be prepared for sales pitches from mortgage lenders about policies that would pay your mortgage balance if you die or become disabled. These are best avoided, however, as a solid life insurance policy will cover that and more.

If you’re splurging on your home choice, keep in mind your monthly budget might be tight. That’s why it’s important to keep the cost of insurance down while still obtaining a high quality policy.

20-year term life insurance

This could be a good, basic type of insurance for you and your spouse with a 20-year term. That will get you to the point where your mortgage balance has been paid down and isn’t the liability it once was.

Term life is basic protection against your death. To put it simply, if you die, your beneficiary receives a lump sum in an amount of your choosing. If you’re unsure of how much to designate, consider using your mortgage balance as a base amount.

If a couple relies more on one spouse’s income, consider making the higher-income spouse’s policy even larger than the basic mortgage amount so the lower-income spouse has something left over after the mortgage is paid.

Starting a family? Consider adding additional term life insurance.

Some financial experts suggest adding 10 times your annual income if you have kids under 10 years old, and five times your annual income if you have kids over 10. If you can’t afford that much coverage, just do what you can. Less coverage always beats zero coverage.

Protection against risk of illness or disability

If you want to add such a policy, you have two basic choices. Critical illness pays a usually tax-free lump sum of money if you meet the specific diseases covered by your policy. Disability insurance pays you a tax-free monthly income if your insurer believes you can’t work due to illness or injury.

Disability insurance

This type of insurance is more comprehensive and covers injury, illness, and helps pay your regular income rather than just paying a lump sum. If you can afford it, disability insurance may be the way to go. The three levels of disability insurance are as follows:

–Any occupation (cheapest option): pays out only in the worst situations where you can do any type of employment suitable for your background

–Regular occupation: your condition only needs to be severe enough that you can’t perform the broad duties of your own profession.

–Own occupation: applies only if you can’t do your own specialized job.

If you’re young and obtaining your first mortgage, your best option might by the Regular Option form of Disability Insurance, since coverage tops out at about 60% of your gross income, as insurers want there to be a financial incentive for you to return to work.

The bottom line:

You may receive completely sufficient group insurance through your employer that covers your life and disability needs. But remember that insurance lasts only as long as you stay at that particular job. If you switch to a different employer that doesn’t offer coverage or become self-employed, it’s important to seek out your own policy. For more on life insurance, read this previous blog post.

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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