There are many provisions in a mortgage, which must be read together and in context. Because of this the only way that you will get a complete answer to your question is to hire a lawyer to read your entire mortgage and advise you on it. That being said, I would guess that one of the events of default under your father's mortgage is the death of the mortgagor. The provision you quoted is one that lessens the impact of the default on death provision by saying that it does not apply if the mortgagor has a credit life insurance policy. A credit life insurance policy is a decreasing term life insurance policy in which the amount of insurance decreases at the same rate as the principal balance of the mortgage. In years past, banks and mortgage companies frequently sold credit life insurance as an adjunct to issuing a mortgage. If you want further clarification, you should consult an experienced real estate lawyer in your area for advice.
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The mortgage will govern the relationship between your father's estate and the lender for the property. If you and your sister intend to keep the property, then hire and attorney to renegotiate the terms of the mortgage or simply pay off the remaining balance. If you do not intend to keep the property, then the property could be sold in the probate of your father's estate and the equity split between you and your sister. Either way, I think you should consult an attorney.
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