The simple answer to this question is no. When you purchase a home, you are not generally required to obtain a life insurance policy designed to pay the remaining balance on your mortgage in the event that you die before you have paid off your home. On the other hand, it is not unheard of for lenders to request something called mortgage protection insurance, designed specifically for this purpose. But if you pass away leaving no spouse, family members, or other heirs as beneficiaries (who would either take over your mortgage and receive the deed or sell the property to pay off the bank), a lender will simply take possession of your property and sell it to recoup their costs. However, there are several benefits to be gained from taking out a mortgage protection insurance policy. Here are a few you should consider before you dismiss the possibility out of hand.
A mortgage protection insurance policy is pretty straightforward. So long as you pay the premiums on your policy, your home loan will be covered in the event of your death. In other words, should you pass away before you have paid off your mortgage, the policy will pay your lender for any outstanding debt on the property, leaving your beneficiaries holding the title to the home, free and clear. This is a desirable outcome for several scenarios. For instance, if you are leaving your home to a spouse or partner that won’t be able to pay the mortgage in your absence, holding mortgage protection insurance will definitely work in your favor. And if you plan to leave your home to adult children that have their own mortgages to cover, similar protection would be advantageous.
You probably want to make life as easy as possible for any family members or other beneficiaries that survive you. The last thing you want is for your loved ones to take on your mortgage debt in your absence. And this has become especially relevant in recent years, what with the housing market crash that left so many homeowners underwater on their mortgages. Ideally, your heirs could simply sell your property following your demise, paying off any remaining mortgage debt and getting a tidy sum for themselves from the proceeds. But if you owe more on your home than it is worth at the time of your death, your only legacy will be the burden of debt for anyone unlucky enough to inherit your property.
The best way to avoid this potential outcome is to provide coverage for the remaining money owed on your mortgage. You could account for this with a standard life insurance policy, arranging for enough money to cover the cost of your home and then some. But you might also want to consider the particular appeal of a mortgage protection insurance policy. This type of policy automatically pays out directly to your lender in the event of your death. This means beneficiaries don’t have to wait for your life insurance policy to pay out in order to pay off the property you leave behind.
If your life insurance payout is delayed somehow (and this is not entirely uncommon), your loved ones could end up taking on the debt of your mortgage payments for several months before receiving any money. As a result, your house could be repossessed by the bank. This won’t happen with mortgage protection insurance. So do you have to carry such a policy? No. But it’s probably a good idea if you want to protect your home and your loved ones should you pass away still indebted to a mortgage lender.