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Life Insurance 101

Whether you’re just diving in or need a refresher, we have helpful guides to get through the basics and help you understand how life insurance can play a part in your financial planning.

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What Happens to Your Debts When You Die?

For a lot of us, it seems only fair that when we die, our earthly burdens should die along with us—including any money we owe to creditors. Unfortunately, the system doesn’t work that way. Even if a borrower is no longer alive to pay a debt, the lender typically is still owed the money. And in most cases, depending on the type of debt, that lender has the right to collect on it.

This reality can create lasting problems for loved ones left behind. But the good news is having a clear understanding of your situation—as well as how debt and the probate process works—can go a long way toward creating financial security for your loved ones. A life insurance policy with a death benefit large enough to cover all your outstanding debts can help prevent further pain for a grieving family.

Here’s a look at what happens to debt, plus what you can do about it.

Who is responsible for paying a deceased person’s debts?

Upon dying, most people leave their assets and personal belongings—known collectively as their estate—to a surviving spouse, children, or other heirs. But if you die with debt, your creditors typically take precedence over your heirs. That means many of your assets will be applied first to settling your debts, and only afterward will your heirs be able to divvy up what’s left over. (Some assets—including those that specify named beneficiaries, such as retirement accounts and insurance policies—are not part of the probate process.)

In general, a creditor cannot take a survivor’s own money to pay off your debt unless that person was a cosigner or joint owner on a loan with you. But the creditor can often take money from your estate to settle the debt.

For instance, if you have a mortgage on the family home and die without leaving enough money or a life insurance policy to cover it, the house would likely have to be sold. Not only could your loved ones potentially lose their home, but they could also be forced to sell the house at a loss or under less-than-favorable market conditions. The lender could end up selling the property to recover the remaining loan balance, potentially causing your loved ones to lose their home.

Also, in community property states—those in which most assets, as well as debts, acquired during the marriage automatically belong equally to both spouses—a surviving spouse may be required to use community property to pay the debts of a deceased spouse. (A surviving spouse in this situation, particularly if the estate is complicated, may want to engage the services of an attorney.)

How soon are outstanding debts due after a borrower dies?

Probate is the legal process of distributing a deceased person’s assets. During probate, the court will determine all of your outstanding debts, and either the executor of the estate or the heirs will provide each creditor with a copy of the person’s death certificate.

When the court or heir notifies the creditor of a borrower’s death, all debts are due, says Bryan Bibbo, lead advisor with The JL Smith Group in Avon, Ohio. Most creditors, however, will cut the survivors some slack. “They understand the estate process, and realize it takes time for the executor of the estate to get everything in order,” Bibbo says.

For instance, if you leave a mortgage loan when you die, your heirs may need time to sell the house to repay the mortgage or, if they prefer, to take over the mortgage payments and keep the home.

In the meantime, Bibbo cautions, “creditors do file paperwork with the court system to claim against the estate.”

Do any debts go away upon the borrower’s death?

Some government-backed debt, such as federal student loan debt in the U.S., is forgiven if the student dies.

Most other debt is still owed after a borrower dies, but not all debts can be collected. Secured debts are those backed by collateral—such as a mortgage or a car loan (secured by the home or by the car). Unsecured debts are not backed by collateral, and include credit card debt, medical debt, and private student loans. If the assets you leave behind aren’t sufficient to cover unsecured debts, your heirs won’t have to pay for it—but the creditors could take a great many of the assets in your estate.

And if the estate doesn’t have enough money in it to pay back unsecured debt? “In those cases, the creditors usually cannot collect,” Bibbo says.

Got debt? Plan ahead.

Nobody welcomes the tough conversations with family members that the topic of death makes necessary. But far worse than having the conversation is plunging family members into a complicated financial situation, on top of the grieving process.

Let your family know if you have outstanding debts and if so, whether you have a life insurance policy in place to cover debt in addition to other considerations. If you don’t have a plan in place, or you’re not sure about your coverage, now may be a good time to check and potentially increase your coverage. For example, seeking out an individual policy to complement group coverage you may have through work may help you cover the full weight of expenses, including debts.

If you need supplemental life insurance coverage to only cover debts, a term insurance policy could help to meet your needs. Another option, especially if you have other financial goals, would be a permanent life insurance policy (such as universal life or whole life). Be sure to investigate all your options.


  • Interview with Bryan Bibbo.

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