For those who have dependents in their family, life insurance is an important part of their financial plan. Without life protection, the untimely death of the primary income earner can devastate a family at the time that they are most vulnerable financially. What many people do not realise is that when you get a mortgage from the bank to buy a piece of real estate, in the majority of cases they will require you to add life insurance cover to your mortgage, and in the situations that they do not mandate your enrolment to life insurance, they will likely offer it to you as an optional extra.
The idea is that if you die, you will not be making any more repayments to your mortgage (!), so to ensure that this does not pass onto your descendants as a debt, the outstanding balance will be paid in full by the insurance policy. It makes sense for the bank, because they do not want to get into the real estate business every time somebody defaults on their loans, and it makes sense for the borrower, because they do not want to shoulder their families with humongous debts in the event that something bad happens to them.
Beyond this, there is a huge benefit from a financial planning perspective. Seeing as you have to make your monthly loan repayments anyway, you don’t have to consider doing anything new outside of simply paying back the bank each month. The repayments will never change relative to your health, so a deterioration in health or the outbreak of a disease will not increase your monthly costs. If you die the property is paid in full and goes to your family. Simple.
Herein lay the numerous secondary benefits. Real estate is tax efficient from an inheritance tax point of view and will be subject to less tax than an equivalent amount in cash or, for example, stocks. Ultimately, your family get to keep more of your wealth because it is in real estate. Finally, in a lot of cases, when families receive a lump-sum life insurance payout they are not used to dealing with large sums of money and will commonly mismanage or overspend the funds, often with disastrous consequences.
In the case that the family receive real estate it is a lot more difficult to mismanage it as they cannot simply divest of the asset and turn it into cash with the click of a button. They will much more likely take the path of least resistance, rent it out, and live off of the monthly income that it produces. For those that have a family to protect, an investment in real estate is often a good start.
Editors Note: Martin King is a UK-born, long-term Japan resident Financial Adviser who works with investors from all over the world to help protect and grow their wealth.