BY ANDREW STEWART
You and your spouse have done your best in planning for the future. Your best friend, who is a mortgage agent, got you qualified at a fantastic interest rate. He then referred you to a really good realtor who found your dream home. Your parents, happy to get you out of the house, gave you the name of their financial advisor to help with advice on how to save and invest your hard earned money. Your insurance advisor calls to congratulate you and your spouse, and says it’s important to meet to secure your life insurance.
You see, life insurance is often purchased as a way to replace a spouse’s earning power, and to cover the mortgage should anything happen to them. A spouse will normally want to make sure their significant other is taken care of. As a result, it’s a common strategy to purchase life insurance at a level in which a mortgage and other major bills could be paid off. For example, if a couple has a $400,000 mortgage and a $50,000 car note, they may opt to take coverage around $500,000 so that if something were to happen, both major obligations could be eliminated.
Fast forward a couple of bliss filled years. Life is unpredictable and sometimes unfair; your spouse passes away suddenly. The plan was to pay off the house and other things with the insurance proceeds. But the reality is, you may not want to stay in the house, you may feel it’s too big and too much work to keep up. You may want to move closer to family or friends or to a new climate. In other words, just because the plan was to pay off the house, doesn’t automatically mean it’s the best thing to do now that things have changed.
The loss of a loved one can quickly turn into a financial situation rather than an emotional one. Everyone has an opinion, suggestion, or financial person they would talk to. These factors, plus the emotional aspect of losing a loved one, can make the decision complicated and confusing. Sometimes, the best course of action is to freeze everything and take time to grieve and mourn. Grief can last weeks or months, and sometimes counselling and medication are required to help cope with loss. Those are not good times to make financial decisions.
Looking at the situation from a financial perspective, mortgage interest is deductible, and if you have a low interest rate, it may not be prudent to lock up your liquid asset by paying off the mortgage. You could invest the proceeds, earn interest and continue to make the mortgage payments comfortably. It is almost always better to have liquid assets to pay for needed expenses than to borrow money when you need to make repairs, especially if you were not the breadwinner. There’s nothing to stop you from taking the big lump of cash you might have and pumping it into your RRSP, if you have unused room. Your tax refund could then be used to pay down your mortgage.
Financial gurus, such as Dave Ramsey and David Bach, advocate paying off your home. The most common and biggest reason is emotional well being. Debt can be emotionally draining and you feel a sense of freedom when you’re rid of it. A secondary reason is when you own your home, you avoid any risk of losing it. The question you need to ask yourself when debating between paying off your mortgage and investing your money is this: if you had your house paid off, would you pull equity out to invest? If your answer is no, then you should now have greater clarity as to the security that comes with a home that is paid for.
The answer to this question is a very personal one that may not be easy to figure out right away. No matter what you decide to do with the life insurance proceeds, remember life is short and to enjoy every living moment.