The role of Life Insurance

This advertorial has been written by our third-party product provider NobleOak Life Limited

Owning a house is one of the most important purchases you can make but it can also be the biggest investment you might face in your lifetime. Most Australians spend a good part of their life repaying their mortgage and unfortunately, some pass away before paying it off.

There are some key things to consider and decisions to make to ensure your family would be in a good financial position if you were to pass away before paying off your mortgage.

Firstly, what happens with your property immediately after your death depends on whether you have a valid will naming one or more beneficiaries of your estate. It is always a good idea to make a will and remember that if you remarry or enter a new relationship, previous wills can become void.

Wills and inheritance can be complex and you should consult a lawyer (and potentially also an accountant or financial adviser) for advice.

What happens if there is no beneficiary?

If you have not organised a valid will, your property is generally divided between your relatives. Inheritance laws vary from state to state, so the property might not go to the person of your choice.

Things can get complicated if you have a blended family.

In some states, a de facto spouse and a legal spouse have the same rights. But in other parts of the country, a legal spouse is allocated a more substantial share than a de facto spouse would be. In some states, people who are dependent on you might also bring claims even if they’re not in your will.

To reduce complications, you could think about making a valid will with identified beneficiaries. But you have to be over 18 (with a few very limited exceptions) and have sufficient mental capacity to create a will. It is typically the case that you will also need two witnesses to sign it to make it valid.

What happens if there is a beneficiary?

If you have named a beneficiary for the property in your will, they will inherit it when you die but they will also inherit any debts tied to it. So, if you have not paid off the mortgage, the beneficiary would have to take care of it.

In Australia, mortgage size can be substantial, and can put a heavy financial burden on the beneficiary. If you are the sole borrower under the mortgage, the bank might even ask the beneficiary to pay the mortgage in full. Here is what typically happens in that case.

The best-case scenario is that there are enough assets in the estate or left to the beneficiary to allow the executor or beneficiary to pay off the debt. In that case, the beneficiary could inherit the property in full after the bank has been repaid the full amount.

However, if there are not enough assets left to the beneficiary to pay the mortgage, the beneficiary might have to sell the property or disclaim the inheritance (unless they decide to use their other assets to meet the mortgage). Depending on how much of the mortgage remains unpaid, there is the possibility that they fall short of obtaining enough sales proceeds to cover the mortgage – if this is the case, the bank can sue them for the balance. In that case, they might have to sell other assets to pay the bank.

Perhaps more commonly, but not always, the bank might let the beneficiary take ownership of the mortgage if they meet the lending criteria. They will then continue to pay the monthly amount.

What happens if you hold the debt jointly with a partner?

Most people in Australia co-sign the mortgage contract with their spouse or civil partner. If you had signed your loan with your spouse or partner, they would assume the mortgage. That means they will be solely responsible for the monthly payments.

Your spouse or partner will not have to sell the house when you die if they are able to meet the mortgage repayments. They will also become the sole owner of the property, subject to the mortgage.

What about if there is a guarantor on the mortgage?

Some people need a guarantor, usually a family member, to qualify for a mortgage. Having a guarantor can also allow them to borrow more without incurring lenders mortgage insurance.

On the flip side, one of the guarantor’s properties might serve as the loan’s security. So, in such a case, if you fail to pay the mortgage, the guarantor will have to do so or risk having to sell the property which they provided as security. If you die, unless there is someone else meeting the mortgage repayments, the bank will ask the guarantor of your loan to pay the mortgage. The bank may force the sale of your property if the guarantor does not have the money.

You should think about a contract with your guarantor that outlines how they will pay off the mortgage if you die.

What happens if you have secured the mortgage against a family member’s asset?

If you’ve secured the mortgage against your family member’s asset, they’re likely to have to meet the debt (unless of course you have other arrangements in place for the mortgage to be paid off). If the bank looks to their assets for repayment, they might instead be able to cover the debt with their own money in a best-case scenario. But they may instead have to sell the assets marked as security for the mortgage.

How can life insurance help?

If you hold life insurance, this can help your nominated policy beneficiary or beneficiaries to pay off the mortgage if you were to pass away as they would receive a lump-sum payout. They can use the money to cover your debts, including the mortgage if they decide to do so.

The good news is that you can choose to cover enough to pay for the mortgage (subject always to underwriting guidelines). That means your beneficiary would be able to inherit the property and be left with enough to meet repayments (assuming they are the beneficiary for your property under your will as well as the beneficiary of your life cover).