What is pledging in a term life insurance policy?
Thanks to term life insurance, it is possible to give your loved ones a financial boost after your death. After all, this insurance pays out an amount once you die, which your family can use to pay the mortgage or cover other investments and expenses.
Often people choose to pledge their term life insurance. This means that you agree with the insurer with whom you have term life insurance to transfer the defined benefit directly to the mortgage lender for loan repayment.
Want to know more about pledging your term life insurance and about pledging with term life insurance? What it entails and when to do it? Read on quickly for answers to all your questions.
When should you pledge term life insurance?
The most common situation in which pledging death benefit insurance occurs is when a mortgage lender requires it in order to obtain a loan. For example, if you have found a home and want to take out a mortgage, the bank may only give you that loan if you link your term life insurance to the mortgage.
Why should you pledge term life insurance?
There are several reasons to pledge term life insurance. Below you get an overview:
1. The mortgage lender requires pledging your term life insurance policy
A common reason to pledge death benefit insurance is when the mortgage lender (such as the bank) requires you to do so in order to obtain a loan. In this sense, there is a link between the insurance and your current mortgage.
Of course, this link only makes sense if you die before the end of the term stipulated with the term life insurance. After all, only then will the insurer pay the amount to your next of kin and they can use it to pay the mortgage.
2. You want to relieve your dependents financially
One advantage of pledging your death benefit insurance is also that after your death, your next of kin won't have any financial responsibilities regarding the mortgage themselves, which is one less worry during the difficult grieving period anyway.
A big part of that relief has to do with the practicalities of making loan payments. Since the insurance money goes automatically and directly to the mortgage lender, there are fewer responsibilities for your dependents after your death.
Is the pledge of term life insurance mandatory?
As already mentioned, mortgage lenders may only give you a loan if you pledge your life insurance. For this, always consult the terms of the mortgage so you know what to expect.
In doing so, the terms and conditions state not only whether it is mandatory, but also how high the insured amount must be to be able to repay the mortgage with the benefit. Inform yourself well about this to avoid misunderstandings.
What are the consequences of pledging your term life insurance ?
Pledging your term life insurance offers some interesting benefits for both mortgage lender and policyholder. Do you want to pawn your current term life insurance policy or link a new term life insurance policy to your mortgage? If so, it is important to consider some implications.
1. Your dependents have less control over the death benefit themselves
An important consequence of pledging your term life insurance is that your next of kin have less control over and insight into the payout of the term life insurance . This also means that they cannot use the amount paid out for just about anything.
2. You sometimes need permission from the mortgage lender to modify your term life insurance policy
Since pledging term life insurance involves a link between your insurance and your mortgage, you may need permission from the mortgage lender to modify certain things about your insurance.
Pledging term life insurance is possible and offers many advantages as long as you inform yourself well about the conditions and possibilities with your insurer. The information above will get you started.