Do you need life insurance for a mortgage?
Getting a mortgage and wonder whether you need life insurance? Find out what you need to consider when answering that question.
At some point in life, if you are buying a property, you may find yourself asking this question: “Do I really need life insurance for a mortgage?” Or is it just unnecessary money leaving your bank account every month?
The answer is a little complicated. You are not legally required to get a mortgage for life insurance. Though the reason why you should get life insurance for a mortgage is that certain lenders may view life insurance as a requirement before approving your request for a mortgage.
Another reason why you should get life insurance for a mortgage is that it provides financial security and peace of mind for your loved ones. For example, you own a house, and you also have a large outstanding mortgage debt that you plan to pay off over the years. But what happens in case you pass away early?
Your family, the people who are dependent on you will be left with that outstanding mortgage! If you own a home, your mortgage will probably be the largest burden you leave behind in the event of some tragedy. So having a policy in place might help you feel more secure.
Three questions you need to ask before buying life insurance
Many homeowners have mortgages because of the high cost of housing. However, getting mortgage life insurance could be a necessary expense especially if you have family members depending on you financially and who live with you.
So, before you decide against buying life insurance, since it’s not mandatory for getting a mortgage, you must ask yourself three questions:
- Do I have family members who are financially dependent on me?
- Would I want more coverage apart from my mortgage coverage?
- Is life insurance a precondition for my lender?
What will happen to your mortgage if you pass away without life insurance?
See, this is something important to remember. When you pass away, any outstanding debts that you owe do not automatically disappear. You must pay off whatever debts you have. And typically, the funds to do so come from the estate or life insurance policy that you left behind.
Mortgage payments must still be made first, even if you don’t have life insurance before any estate assets are distributed to your beneficiaries. Your belongings may have to be auctioned to pay off the debt. If your house is directly inherited by your successor, the new owner will still need to have sufficient resources to cover your mortgage payments.
Your lender may ask that your home be put up for sale to raise the money if there aren’t enough assets to pay off your mortgage. Alternatively, your lender can suspend payments until an executor of the estate is named.
Many people share a mortgage with another person. Suppose you bought a house with your partner. But in case of your sudden passing, your partner will still be responsible for continuing to make mortgage payments. They might have to sell your assets and possessions to raise the funds. They may need to remortgage the house to make the payments. In some worst-case circumstances, they may even be forced to sell the house if the debt cannot be paid off.
In any case, mortgage repayments are going to be a huge trouble for your partner, and for your other dependent family members too, such as your children, old parents, etc.
It’s important to keep in mind that all mortgage lenders have individual policies in place when someone passes away. So, it’s important to have them notified about the changed circumstances as soon as possible.
Why is it important to consider life insurance before buying a house as a couple?
As we mentioned before, things change when you buy a house with your partner. This is when buying life insurance for a mortgage against your house becomes a necessity.
Here is the reason why you should consider getting life insurance before buying a house with your partner.
When you apply for a mortgage, your mortgage repayments will be calculated according to the salaries of two people instead of one. Now, in the event of the sudden death of your partner or yourself, will the remaining partner be able to pay off the outstanding mortgage loan all on their own?
So, in case you pass away during the term of your policy, your partner may not be able to keep up with the regular mortgage repayment schedule. And this will become a great burden for them because then, they will not be able to continue living in that house.
In order to avoid all this unnecessary and completely avoidable hassle, it is advised to get mortgage life insurance. It will help your partner a lot. The policy will provide them with a lump sum amount of cash. They can then use this amount to pay off the remaining mortgage loan. And they can continue living in that house without any fear or trouble.
Why should you get life insurance as a landlord?
You may still require life insurance if you’re buying a house as an investment property. Or if you own a house and want to rent it out. If you have life insurance, you can cover the outstanding balance in the tragic case of your demise.
If you consider refinancing your real estate investment or portfolio, you might wish to increase the amount of life insurance you have to cover the increased mortgage liability. Please be aware that landlord insurance, which denotes improved protection for your home’s structure (buildings insurance), possessions, etc., is not the same as life insurance (contents insurance).
Why should you get life insurance as a tenant?
Contrary to popular belief, homeowners are not the only ones who should consider life insurance. However, just because you don’t have a mortgage doesn’t imply you don’t need life insurance. But it is also true that tenants may not purchase life insurance quite often.
But you must consider that even if you are a renter, the financial implications of losing your income in the event of your sudden demise will be great. The impact on your family members may be devastating. You must consider how the family that is financially dependent on you will pay off the rent.
Or in case, you have children, how will your partner be able to pay for additional expenses like childcare, etc.? Essentially, life insurance is something you should constantly think about if you have dependents who depend on you financially; it’s not just for folks who have a mortgage.
Do YOU need life insurance when getting a mortgage?
Keep in mind that unless a legitimate claim is made, life insurance has no monetary value. It is not a savings or investment product.
Whatever type of life insurance policy you select, paying a little monthly premium can assist your family continues living in your house if you pass away. And just because of this reason, you should consider getting life insurance. Even if you are not legally obliged to do so for a mortgage.