Home equity loans are mortgages, and as with conventional mortgages, equity loan borrowers sometimes die with unpaid balances owed on their homes. You can insure your equity loan debt in a couple of different ways by taking out credit insurance or life insurance. If you fail to set up any kind of insurance, then your estate must take care of the equity loan debt.
When you die, your assets become part of your estate and creditors can make claims upon your estate to reclaim money from unpaid debts, including your equity loan. A probate judge reviews the claims of creditors and can disburse funds from your cash accounts to settle these claims. Your mortgage or equity loan agreement ends upon your death, which means your heirs must repay it in full rather than continue to make monthly payments. If your estate lacks the funds to settle the debt, then your heirs can sell the home to cover the cost of the loan.
When you take out an equity loan, you can buy credit insurance through your lender's insurance division, and the credit insurance specifically insures that debt as opposed to your other obligations. You can buy credit insurance that ensures your loan gets paid in the event that you lose your job, become disabled or die. Comprehensive policies include protection against a series of different eventualities but cost more than basic policies that protect against one kind of event, such as death. You pay a monthly insurance premium to pay for the insurance and it remains in place for the entire loan term.
Credit insurance provides you with the same kind of coverage as life insurance, but for healthy people, a term life insurance policy often costs a lot less and provides a lot more protection. With a term life policy, your family receives a payout if you die within a certain period of time. Your premiums and your coverage come to an end at the end of the policy term. If you die, your insurance company does not pay your loan off for you and, in fac,t your heirs can technically spend the money on something other than you equity loan. However, many homeowners buy sufficient life insurance to cover the balance owed on their mortgage or equity loan.
If you are a coborrower or cosigner on a home equity loan, the loan does not become due upon your death. Therefore, assuming the surviving owner has the means to pay the loan, you do not need cash or insurance to pay off the debt in the event that you die. If you are the primary earner, you should consider buying credit or life insurance, because a lack of financial means could eventually result in your surviving family members losing the house to foreclosure.
- State of Washington: A Consumer's Guide to Life Insurance
- Bankrate.com; What Home Equity Debt is; April 2009
- Consumer Financial Protection Bureau. "Can I Be Responsible to Pay Off the Debts of My Deceased Spouse?" Accessed Aug. 25, 2020.
- Federal Trade Commission. "Credit Insurance." Accessed Aug. 25, 2020.