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.
But specific kinds of debts can become other people’s burden. Here’s how.
|Type of debt||Does someone else get the debt?|
|Mortgage||Yes, if there’s a joint homeowner or if someone inherits the house. But federal law bars lenders from forcing a joint owner to pay off the mortgage immediately after the death of another co-owner. If there’s no joint homeowner, the executor can pay the mortgage out of the estate. If there’s not enough money in the estate, a family member who inherits the house can simply take over the mortgage payments.|
|Home equity loan||Yes, if someone inherits the house. A lender can force someone who inherits a home to repay the home equity loan immediately, which could require selling the house. That said, lenders might work with new owners to let them simply take over the payments on the home-equity loan.|
|Credit cards||Maybe. If the estate runs out of assets to pay credit card balances, credit card companies are out of luck because this debt is not secured by assets the way mortgages and car loans are. But any joint account holder would be responsible for the unpaid bills. People who are simply authorized users of a credit card are not responsible for paying the balance. In community property states (see list below), spouses are responsible for any debts incurred during the marriage, including credit card debt.|
|Car loan||Maybe. The executor can pay the car loan out of the estate. If payments stop, the lender can repossess the car. If the estate can’t pay off the car loan, whoever inherits the vehicle can simply continue making payments and the lender is unlikely to take action.|
|Student loans||Maybe. The estate should pay off private student loan debt, but lenders have no recourse if the estate doesn't have assets to repay unsecured obligations such as student loans. But, co-signers of private student loans will be responsible for remaining debt, and in community property states, the spouse will be responsible if the student loan debt was incurred during the marriage. Some lenders of private student loans will forgive the debt upon death, including Sallie Mae and Wells Fargo. Federal student loans are discharged upon your death. If a student’s parent has a federal PLUS loan, it will be discharged upon the death of either the parent or student.|
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’s protected from creditors
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. But if the life insurance beneficiaries you named are no longer living, your death benefit may go into your estate and can then be subject to creditors. That’s one important reason to make sure your life insurance policy names the proper beneficiaries.
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How life insurance can help
To decide whether you need life insurance to help your family pay debts if you die, consider these questions:
- Do you have family members who would be responsible for your debts?
- Do you have debts that would eat up assets you want to pass on to family members?
- Do you want to pass on money that couldn’t be diverted to pay your debts, even if you owe those debts?
Life insurance can help in any of these scenarios. Term life insurance policies, which provide a death benefit for a set number of years, are suitable for most people’s life insurance needs. If you want to consider a permanent policy, such as whole life insurance, consult a financial advisor.