Purchasing a new home can be both exciting and expensive. While the median U.S. home price was nearly $300,000 in September 2019, regional differences mean some home buyers could be required to spend much more. In California, for example, the median list price for a home hovers around $600,000. With increasing home prices and higher mortgage rates, purchasing life insurance is one way to ensure your family and dependents can stay in your home if a personal tragedy occurs.

Should you pass away unexpectedly, your life insurance policy could play an important role in helping to keep a roof over your family’s head. How well your life insurance policy protects your family or beneficiaries will depend on several factors, including the type of life insurance policy you have, the level of benefits afforded within the policy, and who you have designated as the primary beneficiary.

What happens if you pass away with a mortgage

Legally speaking, a mortgage is a form of debt. Any co-signers or other borrowers listed on the mortgage will have joint ownership of the mortgage and home, and are required to continue making payments on the mortgage should you pass. For many homebuyers, this could be a spouse listed as a secondary borrower, while for other home buyers, this could be a parent or grandparent who co-signed.

If you purchased a home as an individual borrower, your family will not be legally responsible for paying the debt. The mortgage will not automatically pass to another family member, so you won’t have to worry about straddling a family member unexpectedly with your home debt. Instead, your immediate family can voluntarily take on the mortgage debt you’ve left behind, which can happen in several different ways, including through the written will.

Whether or not they’re listed on your mortgage as borrowers, however, there’s a chance those you leave behind may not be able to afford the mortgage payments. This becomes particularly critical if your dependents are under the age of 18, or have a limited income that’s easily overwhelmed by the size of the associated mortgage payments. 

In the event of an unpaid mortgage, the lender can take several different actions, up to foreclosing and selling the home against your family’s wishes.

Life insurance as a mortgage protection option

Your life insurance policy could be a viable option to help protect your family against burdensome mortgage payments and the risk of losing the home you love. However, whether or not life insurance will work to secure your family’s future in the home may depend on the type of life insurance policy you have in place, and who you have listed as the primary beneficiary.

It may be advantageous to review your policy with your named beneficiary to ensure they are aware of this potential level of protection, especially considering that nearly 30% of respondents in a recent survey were not very confident or did not understand life insurance at all.

Mortgage protection life insurance

Most types of life insurance can be used as a means of mortgage protection for your beneficiaries. The primary concern is whether your beneficiaries will have enough money to effectively pay for the mortgage.

Many lenders now offer a unique form of insurance called mortgage protection life insurance. This insurance vehicle is designed specifically to pay off your mortgage in the case of your passing. Many of these policies are sold directly by mortgage lenders or companies associated with the lender.

The advantage of dedicated mortgage protection life insurance is that the benefit goes directly toward paying off your mortgage, and nowhere else. This can eliminate the risk of not leaving enough benefit for your family to pay off the mortgage, or of having multiple beneficiaries who decide to use the death benefits in different ways. 

Mortgage protection insurance is designed to last the entire length of your mortgage. The biggest limitation for some buyers may be the need to purchase an individual mortgage protection policy for each borrower. And if you decide to sell your home and move, you’ll lose your mortgage protection insurance, as it’s non-transferrable.

Most mortgage protection insurance policies will decrease in premium costs as the mortgage is progressively paid off. However, you can also purchase policies that retain the original policy amount and credit any additional amount to your estate and beneficiaries.  

Using term or permanent life for mortgage protection

Outside of mortgage protection life insurance, almost any other life insurance policy you have in place can be used to pay off mortgage debt. The policy will pay out to your beneficiaries in an amount determined by your coverage. And unlike mortgage protection insurance, the amount paid out to your beneficiaries with general life insurance policies can be used for a variety of financial obligations. The right policy should be enough to cover items like mortgage as well as funeral costs, loans, and any other remaining debts. 

Although larger benefits come with higher premiums, there are few limits on the minimum or maximum amount of coverage you can purchase with your life insurance. 

Make sure your policy fits your needs

If you plan to help your family pay your mortgage with your life insurance benefits, you’ll want to ensure your policy will effectively cover those costs. You may even want to purchase enough coverage to make sure your beneficiaries can pay the mortgage off completely, should that be necessary. 

Finally, consider carefully who you list as your beneficiaries, and make sure you update your policy as your life changes -- for example, if you marry, divorce, or have children. Additionally, if all of your beneficiaries are under the age of 18, they cannot make financial decisions on how to use the money, nor will they be able to access the death benefits. You’ll need to either identify a primary adult beneficiary, or dictate an executor for your estate in your will, and earmark a certain amount of your death benefits for mortgage payments.