When someone passes away, it can be upsetting and uncomfortable to figure out the finances of the estate and to navigate the rules of the insurance world. As one of the biggest and longest-term loans you will take out in a lifetime, it is preferable to be alive to see the last mortgage payment paid down and to pass your estate on to your family, debt-free. However, as uncomfortable as it may be, it is important to consider what happens if you pass away before your mortgage is paid off.
What Will Your Homeowners Insurance Policy Do?
Your homeowners insurance policy will not pay off any more of your mortgage after you pass away. Homeowners insurance covers damages to your home, liability on your property, and personal belongings. So, if your home is damaged in a disaster like a hurricane or a fire, your insurance will cover you for the structure of your home and your personal belongings that were inside. The payment the insurance company provides will be minus the deductible of the policy. The policy will also pay for liability coverage and will defend you against lawsuits if anything happens on your property. After the policyholder dies, surviving family members will have to speak with the insurance agent to see if the house will still be covered properly and if they need to change the name of the policyholder or not. Generally, the policy covers relatives living with the person on the policy as well, so if there were family members living with the person before they passed away, they should clarify with their agent if they are still covered or not.
When the owner passes away it is important to not clear the house of all furniture and belongings right away. This is because when a house does not have anyone living in it and is void of enough furniture for people to live in it, then it becomes a vacant property, which is much more expensive to insure because it is more susceptible to vandalism.
Other Insurance Options
If you purchase a home when you are older and are able to afford it, it may be helpful to hasten the process of paying off your mortgage by obtaining a much shorter-term loan. But this might mean very high payments and may be out of reach for many people.
One of the best ways to be able to cover your mortgage or outstanding bills and loans following your death is through purchasing a term life insurance policy that does not have limits on what the policy can be used for.
Another option to consider is known as mortgage life insurance or mortgage protection insurance. This form of insurance may be available to you as an add on to your homeowners insurance or through a separate insurance company. These policies are known for being expensive but may be worth it to you to protect your family and estate from losing your house. The idea is that you buy the policy for this situation, in case you die before paying your mortgage off. These policies decrease in their value as you pay your mortgage each month because with each payment there is less and less of your mortgage to cover in the case of your death, and the premium stays the same. You have the option to purchase the policy at any time because they generally do not require any health questions. Because both the premium and mortgage amount will stay the same for this option, there may be a point when you have paid more in premiums than you will ever get out as an insurance benefit. This is obviously bittersweet because the mortgage insurance may have been a waste of money, but you are still alive.
Because of the lower cost and the option to do whatever you or your family wants to do with it, a life insurance plan may be a better option. It may be beneficial to talk to an agent for each insurance option to get a better idea of what is available to you and what will work best for you, your estate, and your family.
