Let’s assume you are the primary income producer or half of a dual-income situation and become a proud owner of a new home, rental property, or real estate. You’ve received a mortgage because the lender felt comfortable with your income level and financial situation. What happens if you become disabled and can’t work, or worse, what if you die? Besides the emotional trauma, a surviving spouse or domestic partner could experience a significant drop in the household income, a drop that may produce severe financial problems that could lead to a forced sale of the home, potentially at the worst possible time. It could maybe even cause foreclosure.

Being prepared for the “what if”

According to a study done each year by Cornell University, in 2006 almost thirteen percent of Americans between the ages of twenty-one to sixty-four who were filed into foreclosure were on disability. Almost nine percent of those disabled were actively looking for work but not employed.

Being ready for financial bumps in the road, or what I like to call “what-if scenarios,” is key to staying the proud owner of your home and not ending up in debt or foreclosure. For example, what if one year after you buy the home there is a huge rainstorm and you discover a leak in the roof that no one noticed before?. To make matters worse, what if you find wood rot and mold where the leak had been? What if the variable interest rate on your mortgage goes up, suddenly raising your monthly payment by thirty percent? What if you’re laid off or become disabled and find yourself out of work for several months or longer?

Being proactive and doing some simple contingency planning could make a big reduction in the number of people who lose their homes. Let’s discuss four options that future and current homeowners should consider to help protect against the “what ifs’” and keep you in your home and out of debt.

1. A cash reserve

It may seem obvious but sometimes the things that are the most obvious are the easiest to overlook. Many people will buy a house and have little to no cash left over for contingencies or “what ifs.” Their thought is they would rather pay a mortgage than rent, but people forget that when the house needs repairs they can no longer pick of the phone and call the landlord or maintenance office. Repairs become the responsibility of the homeowner, and when the first bill from the electrician or plumber comes, it can be quite a wake-up call.

You may have heard it said before, that ideally you should have the cash equivalent of three to six months of expences in an account that is liquid and easy to access. The type of account you use is not overly important, so don’t let that decision stop you. Whether it is a savings account at the local bank or credit union, a money market account, or even a cookie jar. Heck, the way interest rates are today, the cookie jar may not be so bad.

Or course I am kidding about the cookie jar, but if that is what you need to do to get started today, fine. The point is to have money somewhere you can access easily in the event of an emergency, without having to pay fees and penalties or charging it on a credit card.

2. Disability insurance

What if you get hurt and you can’t pay your bills? Who will? Disability insurance is designed to replace a portion of your income should you become disabled and can’t work. Typically you receive the income monthly, on a tax-free basis, and can use the money however you like. In general there are two types of policies, short term and long term. A lot of employers will offer a short-term policy as an automatic benefit. These policies are usually limited to covering only fifty percent of your regular pay and will cover you only for a period of about thirty days. What if you’re disabled for longer than thirty days or you become permanently disabled? You may have the option of increasing your coverage at work either to a longer period of time, like for five years or even to age sixty-five, which is the typical maximum. You could also have the option of increasing the monthly benefit to pay you up to seventy percent of your normal pay instead of fifty percent.

If your employer does not offer coverage or you would like a more comprehensive plan, don’t worry; there are plenty of companies that offer an individual policy you can tailor to fit your personal needs as well as affordability. Whether at work or individually, with both short- and long-term policies, there is often a variety of options in addition to the monthly benefit, so make sure you know what you’re paying for and not getting more or less than you need.

If you’re not sure where to start, a good question to ask yourself is “if I become disabled what would I need to get by?” Most people would not be able to live on fifty percent of their income. When you get coverage, it is important to review the company’s definition of “disability” so you know how and when you can expect a check. That way it’s less likely you will be denied when it is time to make a claim, which is also why it is important that the company you buy from should have a good claim-paying history.

If you are one of the many people who thinks Social Security will be the only disability policy you need, think again. Of the more than three million claims filed each year, the average processing time was 106 days, and sixty percent of the claims are denied. This information is available on the official Web site for the Department of Social Security at www.ssa.gov, and you can also type in the follow link and check out the fifteen-page chart on the entire claims process: http://www.ssa.gov/disability/od_process.pdf. Just don’t do it while operating heavy machinery, if you catch my drift (it’s boring).

On a final note, be careful not to confuse disability insurance with workman’s comp, which will pay you an income only if you are injured at work during a job-related activity and is paid as taxable benefit.

3. Mortgage insurance

So far we have discussed the "what ifs'" for when you experience a financial bump in the road or become disabled, but neither of those options will be of much help if you're not here at all because you pass away. Unfortunately dying is not a matter of “what if.” Instead it's about “when.” If you die before your property is paid off and are concerned about the outcome of the home and those still living in it, consider mortgage insurance.

Mortgage insurance is usually purchased though the bank or lender. The idea of mortgage insurance is for you to pay a monthly premium, and the lender receives the proceeds at the insured’s death. When you purchase insurance from a bank or mortgage company, the bank or lender has ownership and therefore is in control. Sometimes the lending institution preprints its name on the beneficiary line of the policy. It receives the proceeds of the policy, and your family receives the deed to the house. Very often your mortgage is your biggest expense, so having this type of coverage is beneficial and can decrease the chances of a foreclosure or forced sale of the home after the loss of a primary income.

Here are a couple of important things to consider when purchasing mortgage insurance:First, even after the mortgage is paid off, will you (as the surviving spouse in this scenario) be able to afford all the other expenses that come with ownership, such as maintenance, utilities, and property taxes? Also, would you want to stay in the house after the loss of a spouse or loved one? Note that while the balance of the mortgage decreases as you pay it down, the premium for the mortgage insurance stays the same.

An alternative to purchasing mortgage insurance through the bank is to use personally owned life insurance to pay any outstanding mortgage balance.

4. Life insurance

Rather than insurance offered through a lending institution, you might consider purchasing personally owned life insurance. As owner, your spouse (assuming your spouse is the beneficiary)—not the lender—receives the insurance proceeds at your death. The money received is typically free from federal income tax and can be used for any purpose, so your spouse can decide what to do with that money. At the time of purchase you choose how much coverage (death benefit) you wish your heirs to receive. The beneficiary (or beneficiaries) can use the proceeds to pay the mortgage in one lump sum or continue paying it down periodically. With this type of protection, your beneficiaries are in the driver’s seat.

Personally owned life insurance is portable, which means that if you move in a few years, you won’t have to replace your insurance, which could be a costly process. Furthermore, even after the mortgage is paid, personally owned life insurance can provide a valuable insurance benefit and be used to replace income and pay for college costs.

There are different types of personally owned life insurance. Term insurance lets you purchase insurance protection for limited periods of time at a competitive price. Coverage is available in one-, five-, ten-, twenty-year and other time increments. There is a guaranteed death benefit, provided premiums are paid when due. Generally speaking, term insurance is convertible to permanent life insurance without showing proof of insurability.

Permanent insurance plans, such as Whole Life, have higher premium costs than term products, but give you the benefit of building cash value. With Whole Life, you are insured for your entire life, provided you pay all the premiums. The premiums of the policy remain level and at a fixed amount. A portion of the premiums you pay for permanent insurance coverage builds tax-deferred cash value each year, so while you may initially purchase Whole Life insurance as a mortgage protector, you can access the cash value accumulation at any time through loans* for other means, like college funding.
Taking the necessary steps today can help insure your family’s financial future tomorrow.

An example of a good plan is having a sufficient cash reserve, long-term disability, and personally owned life insurance. A cash reserve will get you through a short bump in the road like a temporary layoff or the need for a new roof. A long-term disability policy will help you pay for things like the utilities, mortgage, and groceries and could pay you a benefit equal to as much as seventy percent of your salary until age sixty-five. Finally, mortgage insurance or life insurance will pay for outstanding mortgage balances left behind should you pass away.

Remember the value of working with a knowledgeable professional you can trust when purchasing any kind of insurance; a professional can help you put together the right options for your specific situation. After you achieve your dream of owning a home, a good plan will help you keep it.

For more information contact Financial Services Professional Dallas M. Cyr, New York Life Insurance Company/NYLife Securities, at 860-298-1033

*Loans against your policy accrue interest and decrease the death benefit and cash value by the amount of the outstanding loan and interest.


Rehabilitation Research and Training Center on Disability Demographics and Statistics. (2007). 2006 Disability Status Report. Ithaca, NY: Cornell University.

Department of Social Security, www.ssa.gov ,
The information at the top of the chart indicates the volume of cases that were considered and processed in FY 2001http://www.ssa.gov/disability/od_process.pdf

6/18/2007 - ForeclosureS.com: Growing Foreclosure Numbers Don't Spell Doom

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*** SEE MY BIO ON MY EXPERT PAGE***Financial Services Professional Dallas M. Cyr, New York Life Insurance Company/NYLife Securities, at 860-298-1033