I’ve spoken with a lot of life insurance advisers and I’ve seen a lot of documented life insurance advice.

Something that is almost cliche is that if a client dies, they want their mortgage to be paid off. Quite often it’s the start and end of the conversation. 

I see a fair amount of sense in that. Things can be a lot worse than leaving your family with an unencumbered home in which to live.

But I think this approach lacks nuance. There are better questions to ask.

Whether a client has a mortgage shouldn’t really be the question. The question is, if you unexpectedly die, what do you want to provide for your dependents? This relates to accommodation. It relates to education for your children, and perhaps the cost of retraining for your partner. It relates to expenses that might follow from your death such as funeral expenses and estate administration. It relates to maintaining a certain type of lifestyle for your loved ones.

One of the things that I especially dislike about this focus on mortgages is that advice can lead to very different outcomes for two sets of clients whose situation is otherwise identical – with the exception that one set owns their home (and has a mortgage) and the other does not own and does not have a mortgage.

If, for example, compare one set of clients who own a property and have a mortgage, with another set of clients who take the view that buying property isn’t their bag in the current market. If someone from the second set of clients were to pass away, it is very likely that they still want to ensure the other is supported and is able to keep a roof above their heads. It might be suitable for them to leave a lump sum to the other, with the income generated by that lump sum to be earmarked for accommodation in the form of rent. It is absurd to suggest that, because the the second couple does not have a mortgage, they should be insured for less.

Consider it another way. Let’s say my wife and I currently do not own a property. But we expect to buy a property in the coming month or so. Our net wealth will be essentially the same before and after the transaction. The difference after the transaction is that we will have an additional asset in the form of a house, and an additional liability in the form of a mortgage.

If I were to die before buying a house, I would want the same outcome for my wife and children today as the outcome I would want after buying the house. Which is to say, I want to ensure that their accommodation needs are sorted, for as long as my wife lives, and for as long as my children are financially dependent. Whether we own a house or whether we rent, the outcome I want is the same. I want to ensure they have the same high quality level of accommodation, whether I own a property at the time of my death or not.

My point is this. The mortgage is a red herring. The desire to, among other things, provide accommodation for loved ones is the important factor.

Another corollary of this is that “repaying the mortgage” might also lead to over-insurance. If one person was to die, it is quite possible that current accommodation arrangements may no longer be unsuitable – the house may be too big, or unsustainable in terms of ongoing costs of ownership. Again, the bigger picture question is to look at what would need to be provided for the other(s) to provide for accommodation. This needs to be considered in light of other factors, including what level of support they want to provide in terms of education, maintenance of lifestyle, and the like, as well as the asset position of the couple. 

Mortgages – and other debts – are a factor when determining level of cover. But they are secondary to the initial, bigger picture question of what you want to provide for your loved ones if you were to die. It’s only after looking at what you want to happen, that you should consider your existing asset and liability position, including the existence (or otherwise) of a mortgage

Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).