Any debts you leave behind when you die can eat up assets that you had hoped to leave to heirs. In some cases, family members could even be on the hook for your debt. Many people buy life insurance not only to leave something behind for their loved ones but also to help deal with any debt and final expenses.
Your debts become the responsibility of your estate after you die. Your estate is everything you owned at the time of your death. The process of paying your bills and distributing what’s left is called probate.
The executor of your estate, the person responsible for dealing with your will and estate after your death, will use your assets to pay off your debts. This could mean writing checks from a bank account or selling property to get the money. If there isn’t enough to cover your debts, creditors generally are out of luck.
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But specific kinds of debts can become other people’s burden. Toggle through these accordions to see whether your debts could be someone else’s problem after you die.
Circumstances where others are responsible
Spouses and others generally are responsible for paying debts if they:
- Co-signed for a loan
- Are joint account holders
- Are spouses in community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Spouses aren’t responsible for debts that predate the marriage, although half of any community property from a marriage could be put toward debt obligations.
Debt collector calls
Under Federal Trade Commission rules, debt collectors can contact a deceased person’s spouse, parents if the deceased was a minor child, guardian, executor or administrator to discuss the debt. But collectors can’t mislead family members into thinking they’re responsible for paying the debts if they’re not.
You have the right to tell a debt collector to stop contacting you by sending a letter. Read more from the FTC.
What creditors can’t take
Creditors typically can’t go after your retirement accounts or life insurance benefits. Those will go to the named beneficiaries and aren’t part of the probate process that settles your estate.
Because life insurance payouts are protected from creditors, you can use a policy to protect family members who would be responsible for your debts or simply to make sure you have money to pass on. In addition, life insurance payouts are usually not taxable.
Term life insurance policies, which provide a death benefit for a set number of years, are suitable for most people’s needs and cost less than permanent life insurance.
One important note: If the life insurance beneficiaries you named are no longer living, your death benefit may go into your estate and be subject to creditors. Keep your beneficiary info updated.
Amid the COVID-19 pandemic, not all companies are accepting new life insurance applications. For the latest information on how to cope with financial stress during this emergency, see NerdWallet’s financial guide to COVID-19.
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