What's the difference between life insurance and a will for home buyers?

Buying a home is a significant financial milestone and likely the largest asset you will own. With this investment comes the responsibility to protect it and the people who share it with you, particularly if you have a mortgage.

To do this, many people consider life insurance and a will. While both are key parts of financial planning, they serve very different functions. This guide explains their distinct roles and why, as a new homeowner, having both is often necessary for comprehensive protection.

What is life insurance?

Life insurance is a private contract you have with an insurance company. You pay a regular fee, known as a premium, and in return, the insurer agrees to pay a tax-free lump sum of cash, or "death benefit," to your chosen recipients when you pass away. These chosen people are your beneficiaries.

Its main purpose is to replace your income. For a new homeowner, it can function as "mortgage protection." The cash payout is designed to provide your family with enough money to pay off the mortgage, ensuring they can remain in the home without the burden of your share of the repayments. It acts as a financial safety net for your largest debt.

There are several different types, but the most common for homeowners is Term Life insurance. It is an affordable option that covers you for a specific period, such as the 25 or 30-year term of your home loan.

What is a will?

A will is a public legal document. It is your official set of instructions that outlines what you want to happen to your property and assets after you're gone. It is not about providing new cash, but about directing where your existing assets go.

Here’s what a will typically covers:

• Asset Distribution: This is where you decide who inherits your property. It includes your house, savings accounts, car, and personal items. You have the final say on who receives what.
• Guardianship: For families with children, a will is where you officially name the person or people you want to raise your minor children if you are no longer around. The Family Court gives significant weight to these wishes.
• Executor: This is the person you nominate to be in charge of carrying out your instructions. It should be someone you trust to manage the process, from paying final bills to distributing your assets to the correct people.

Without a will, you are considered to have died "intestate." In this case, you have no say in how your assets are distributed. Instead, state laws decide distribution, and these rules might not align with your wishes. This can lead to delays, family disputes, and additional stress for your loved ones.

How life insurance and wills protect your assets differently

While both a will and life insurance are intended to provide for your loved ones, they function in different ways. One is a private contract that delivers cash relatively quickly, while the other is a public legal document that transfers ownership of assets more slowly. The following graphic breaks down the key differences.

Let's look at the key differences.

Life insurance provides immediate cash for debts

The most significant advantage is liquidity. The payout goes directly to the beneficiary you named in the policy. It completely bypasses your estate and the legal process that a will must go through.

This money is designed to handle immediate financial pressures, and for a homeowner, the mortgage is often the biggest one.

For example, if you pass away unexpectedly, your partner, who you named as your beneficiary, can file a claim with the insurance company. Within a few weeks, they can receive the payout. They can then use that cash to clear the mortgage, removing a major financial burden during a difficult time.

A will transfers legal ownership of the property

A will functions differently. It does not create cash, it provides the legal instructions on who officially inherits the property itself. Its purpose is to handle the legal title transfer of the asset.

So, even if your partner uses a life insurance payout to pay off the mortgage, your will is the document that ensures the house is legally transferred into their name. Without it, the ownership of the home remains unresolved.

If you do not have a will, the house is distributed according to strict intestacy rules. Depending on your family situation and your state of residence, this could mean your home's value is split between your spouse and other relatives, which may not be what you wanted.

The crucial difference: Who gets the final say?

The beneficiary you name on your life insurance policy will override your will when it comes to that specific payout. The insurance policy is a separate contract that stands on its own.

For example, if you name your sister as the beneficiary on your life insurance policy but state in your will that "all my assets should go to my spouse," your sister will still receive the insurance money. Your will has no power over that life insurance contract.

This is why it is important to keep your beneficiaries updated on all your policies. Outdated beneficiary designations can cause confusion and legal disputes, so it is wise to check them every year or two.

The probate process: A key timing difference

The timing of when your family receives support is a significant factor. This is where the difference between a will and life insurance becomes clear, and it relates to a legal process called probate.

What is probate and why does it matter for home buyers?

Probate is the official legal process where the Supreme Court of your state formally recognises a will as valid. This process gives your executor the legal authority to manage your estate and distribute your assets according to your instructions.

However, this process is not immediate. It involves lodging documents with the court, advertising the application, and waiting for the court's review. Receiving the official "grant of probate" can take a few weeks to several months.

While your will is tied up in probate, mortgage repayments do not stop. Council rates, utility bills, and property taxes are still due. Your assets, including the home, are essentially "frozen" until the court gives the executor approval to proceed.

How life insurance bypasses probate

This is a key benefit of life insurance. As mentioned, a life insurance payout goes directly to your beneficiary. It is not considered part of your estate, which means it doesn't go through probate.

This provides your family with immediate cash to continue paying the mortgage and keep the household running while they wait for the rest of your estate to be settled.

It acts as a financial bridge, keeping your family financially stable and secure in their home during a potentially lengthy legal process. Without it, your loved ones might have to use their own funds for the mortgage while waiting for access to the assets in your estate.

Do you need life insurance, a will, or both?

The answer is that you likely need both. They are not competing options but two essential parts of a financial protection plan designed to work together to protect your family and your new home.

You need life insurance if...

• You have a mortgage or any other significant debt that would be a burden for your family.
• Someone, such as a spouse, partner, or child, depends on your income to pay bills and maintain their lifestyle.
• You want to ensure your family can stay in their home without financial hardship if you are no longer around.
• You do not have enough cash savings to cover the entire remaining mortgage balance and ongoing living costs for several years.

You need a will because...

• You want to decide who legally inherits your new home and all your other assets.
• You have children under 18 and need to appoint a legal guardian to care for them.
• You want to appoint an executor you trust to manage your affairs and make the legal process smoother.
• You want to prevent potential disputes between family members over who gets what or who should be in charge.

Aligning your plan for peace of mind

These two documents work together as a team. Life insurance protects your family from your debt, and a will protects your assets and your family's future. The insurance payout clears the mortgage, and the will ensures the house legally passes to the right person.

Once you have both in place, it is a good idea to review them every few years or after any major life event, like getting married or having another child, to make sure they are still aligned with your wishes.

In the past, creating a will often involved consulting a lawyer in person. Today, online platforms provide another option. For example, platforms like Willfully allow you to create a legally binding will online in about 20 minutes. For a one-off fee of $159.99, you can ensure your new home and family are protected according to your wishes.

Protecting your home and family

For new home buyers, the question is not about choosing between life insurance vs a will. It is about understanding the need for life insurance and a will. They each play a unique and vital role in a solid financial plan.

Let’s recap their core functions. Life insurance provides the fast, tax-free cash your family needs to pay off the mortgage and remain financially stable. A will provides the legal instructions on who officially inherits the house and all your other assets, and who will look after your children.

Arranging these two documents is one of the most important steps you can take as a new homeowner. It is how you turn your new house into a secure home for your family, regardless of what the future holds.

Don't wait

Ready to tick your will off the to-do list?

With Willfully, you can create your official Australian will online in about 20 minutes for just $159.99. Every will is reviewed by a qualified Australian lawyer to ensure it’s legally sound, and you get 12 months of free, unlimited updates, which is ideal for new homeowners as life changes.

Secure your legacy and protect your new home today. Get started with Willfully.