Life insurance for homeowners

Homeowners insurance protects the house from fire, storms and liability; it does nothing if you die and the mortgage payments stop. Life insurance fills that gap. Most homeowners with dependents are best served by a level term policy that runs at least as long as the mortgage, paid to the family, so they can choose to pay the loan off or keep paying it. The amount should reflect the home's loan balance plus the other costs of staying there.

What happens to a mortgage when a homeowner dies

The loan does not vanish and it does not automatically fall due. The mortgage is a debt secured by the house, and the estate or the people who inherit the home remain responsible for it.

• Federal law (the Garn-St Germain Act) generally prevents a lender from calling the loan due solely because a borrower died and a spouse, child or other relative inherited the home, as long as payments continue. Under the Consumer Financial Protection Bureau's servicing rules, a confirmed successor in interest can generally get account information and apply for loss mitigation, without being required to assume personal liability for the debt.
• A surviving co-borrower is still responsible for the full payment, and often loses an income to pay it.
• If nobody can afford the payments, the lender can foreclose, and the family may have to sell.

So the protection isn't "the house is safe," it's "can the survivors keep making payments, or sell on their own terms?" Life insurance buys that time and choice. If you're facing the debt side, what happens to your debt when you die covers what happens to other loans.

Three ways to use life insurance with a mortgage

Our guides to mortgage protection insurance vs term life, level term vs decreasing term life insurance and credit life insurance: what it is and when it's worth it compare these in detail. Most families are better off with ordinary term insurance, because the family decides whether to pay off the mortgage, rent the house, move or keep the loan at a low rate.

Sizing: beyond the loan balance

Paying off the mortgage is only part of what a household needs to keep the house. Property taxes, homeowners insurance, maintenance and utilities continue after the mortgage ends. Our using term life insurance to cover a mortgage guide covers the balance question; here is how to think about the whole home.

1. Loan balance. The principal you owe, from your mortgage statement. A home equity loan or line of credit counts too.
2. Do you want it paid off? If the survivors keep a 3% mortgage, paying it off may be less valuable than using the money elsewhere. If you are on a high rate, paying it off is more attractive.
3. Ongoing costs of staying. Taxes, insurance, repairs and utilities for a number of years.
4. Income replacement. The mortgage payment is part of your household's monthly budget. If you pay off the loan, subtract the payment from the income you replace so you don't count it twice. How much life insurance do I need? covers that step.
5. Other needs. Children's education, childcare and final expenses.

Say a hypothetical 36-year-old homeowner owes $320,000 at 6.5% on a 30-year loan, with $14,000 a year in taxes, insurance and upkeep. Her family could receive $320,000 to clear the loan, plus several years of ownership costs ($14,000 times 10 years is $140,000), plus income and education needs. The mortgage part alone is closer to $460,000 than $320,000. The How much life insurance do I need? runs this with your own numbers.

Matching the term to the loan

Pick a term at least as long as the remaining mortgage or the years your family would depend on your income, whichever is longer. A 30-year mortgage taken at 35 argues for a 30-year term, though you can also use two policies, such as a 30-year policy for the base need and a 15- or 20-year policy for the years when children are young. This approach, known as a ladder, can lower the cost; see laddering term life policies to match your needs. The How long a term do I need? helps match the term to the loan.

If you refinance into a new 30-year loan, your original term may now end before the loan does. Check before you refinance, and when you pay extra principal, you may be able to shorten the term you need.

Practical steps

1. Pull your latest mortgage statement and note the balance, rate and years remaining.
2. Add your ongoing homeownership costs and the other needs in the list above.
3. Subtract savings and existing coverage, including group life, which usually ends if you leave your job.
4. Choose a term that outlasts the mortgage.
5. Name your spouse or partner as primary beneficiary and a contingent beneficiary behind them; if your co-owner is not your spouse, see life insurance for unmarried partners.
6. Make sure the title and the loan are in names that match your plan. Joint ownership with survivorship can simplify the transfer of the house, but not the loan.
7. Review the coverage when you refinance, sell, add a home equity line, or pay the loan off.

Special cases

• Lender-required coverage. Some lenders, especially for business or SBA loans, require a policy assigned to them as collateral; see collateral assignment of life insurance. Ordinary home mortgages do not typically require life insurance.
• Two incomes. Insure both borrowers. If either dies, the survivor often can't carry the whole payment alone; see life insurance for married couples.
• Paid-off home. Without a mortgage, you may need far less; you still need to consider taxes, upkeep and the surviving spouse's income. See life insurance when the kids leave home and life insurance in retirement: keep, cut or cash out.
• Private mortgage insurance. PMI protects the lender if you default; it does not pay anything to your family at death.

Key takeaways

• Homeowners insurance doesn't pay your mortgage if you die; life insurance does, if you buy enough.
• Level term paid to your family usually beats mortgage protection insurance, which pays the lender and often costs more per dollar of coverage.
• Size coverage to the loan plus the costs of staying in the home and the income your household needs.
• Pick a term at least as long as the mortgage, and recheck it when you refinance.
• Heirs generally can't be forced to repay a mortgage immediately just because the borrower died, but they still need money to make payments or sell.