Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
One of the key reasons to have life insurance is to help pay off debts you have when you die. You don’t want to saddle your family with expenses they might not have the means to cover without your financial support.
But do you need to have a life insurance policy with a death benefit that is large enough to cover everything you owe? Not necessarily.
It’s important to know how various types of debt are handled after death. This will help you determine how much life insurance you need to cover debts that must be paid.
Who Is Responsible for Your Debt After Your Death?
Debt doesn’t simply disappear when you die. But that doesn’t necessarily mean someone else has to find a way to pay all off your debts. Creditors can collect what is owed from your estate.
Typically, creditors have a certain window of time after you die and once the probate process begins to submit claims for what you owe, says Josh Berkley, an estate planning attorney with Berkley Oliver PLLC in Kentucky.
Probate is the legal process where assets from your estate are distributed and debts are paid. Property and assets that were in your name only are considered part of the estate and can be used to pay off your debt, Berkley says.
However, there are situations when your loved ones can be responsible for paying some of your debts.
- If you have a co-signer on a loan or line of credit, the co-signer will be responsible for paying the debt after you die.
- Your state law might require your spouse to pay certain debts.
- If you live in one of the community property states, your spouse might have to use property that you owned jointly—rather than property that only was in your name—to pay your debts. Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin are common law states. Alaska has an optional community property system.
The type of debt you have also can affect whether it will have to be paid after your death. Here’s how these common types of debt typically are handled:
- Mortgage Debt
- Credit Card Debt
- Student Loan Debt
- Car Loan Debt
- Medical Debt
What Happens to Mortgage Debt
If you and someone else such as a spouse or partner took out a mortgage together, what happens to that debt is straightforward.
“The surviving borrower is responsible for the loan,” says Leslie H. Tayne, a New York debt settlement attorney. If you don’t want to leave the co-signer on the hook for the remaining balance, a sufficient life insurance policy can help cover the cost. So factor in how much is owed on your mortgage when calculating how much life insurance you need.
If there is no co-signer on the mortgage, no one has to take on the obligation. However, that doesn’t mean your family can inherit the property free and clear. If they want to keep the home, they will have to assume responsibility for the loan, Tayne says.
Even if they want to sell it, they will need to continue making mortgage payments until the house is sold. And the remaining mortgage debt will have to be paid off once the house is sold.
If no one takes over the mortgage after you die, the bank can foreclose on the property, Tayne says. It can then sell it to recover the amount owed on the mortgage.
What Happens to Credit Card Debt?
If you have any credit card accounts with a joint account owner, the co-owner will have to pay any balance on the account.
Be aware that a joint owner is different from an authorized user you’ve allowed to use your credit card. An authorized user will not be responsible for your credit card debt. If you have credit card accounts in your name only, the credit card companies can make a claim to get paid through your estate.
“If there is no estate, no will and no assets—or not enough to satisfy these debts after death—then the debt will die with the debtor,” Tayne says. “There is no responsibility by children or other relatives to pay the debts.”
What Happens to Student Loan Debt?
You’re in luck if you have federal student loans because they will be discharged if you die. That means they won’t have to be paid. Any PLUS loan your parents took out to pay for your college education also will be discharged if you die. A family member will need to provide your loan servicer with a death certificate to prove your death and have the loans discharged.
You’re not so lucky if you have private student loans.
“There’s no official discharge of private student loans, unlike federal student loans where the debt dies with the debtor or student borrower,” Tayne says. If the loans are in your name only, assets from the estate can be used to pay what is owed if the lender doesn’t discharge the debt.
If you have a co-signer for a student loan, that person will be responsible for what is owed. In fact, some lenders include clauses in their contracts that require the balance to be paid immediately if a co-borrower dies, Tayne says.
Of course, a life insurance payout could be used to pay off what is owed. However, the co-signer might be able to negotiate with the lender to amend the contract after the other co-signer’s death. It could help to work with a debt relief attorney who has experience negotiating with lenders in this situation.
What Happens to Car Loan Debt?
Your family will have a few options to handle any debt you owed on a vehicle:
- They could let the lender repossess the car if they don’t want it.
- They could sell the car to pay off the loan.
- Or they could keep the car by continuing to pay what is owed on the loan.
However, they likely will need to qualify as a borrower to maintain the terms of the loan or apply for an entirely new loan, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.
Of course, if there is a co-borrower on your car loan, that person will be responsible for the loan. That’s another debt you should factor into your calculations when figuring out how much life insurance to buy.
What Happens to Medical Debt?
Unfortunately, medical bills don’t go away when you die. The care provider or collection agency will have to decide what course it’s going to take to recover the money. If you owe just a small amount, the provider might declare the bill uncollectible and close the account, McClary says. If you owe a lot, it might try to collect what is owed from your estate.
Medical debt is the one type of debt where there usually isn’t a co-owner. The patient is responsible except in situations when the patient is a child. Then the parent would be responsible for the bill, McClary says. For situations such as that, a life insurance policy on a child could help cover the bill.
Compare Top Life Insurers
Other top strength
Mutual of Omaha
Other top strength
Other top strength
Access to cash value
See the full list: Best Life Insurance Companies of 2024
Adding Up Your Debts
Consider all of the types of debt listed above when determining how much life insurance you need.
Keep in mind that even though your family might not have to use their assets to pay what you owe, any assets that have to be taken from your estate to cover your debts will leave your loved ones with less. A payout from a life insurance policy could be used instead to cover your debts so your property doesn’t have to be sold and assets don’t have to be drained.
Compare Life Insurance Companies
Compare Policies With 8 Leading Insurers
As an expert in financial planning and insurance, I have extensive knowledge of the intricacies involved in managing debts, especially after one's demise. Let me dive into the concepts covered in the article and provide additional insights:
Debt After Death: Understanding the Landscape
1. Responsibility for Debt After Death:
Estate and Probate Process:
- Creditors can collect owed amounts from the deceased's estate during the probate process.
- Probate is where assets are distributed, and debts are settled.
- Assets in the deceased's name only are considered part of the estate and can be used to pay off debts.
Co-Signers and State Laws:
- Co-signers on loans or lines of credit may be responsible for the debt.
- State laws, especially in community property states, can impact the responsibility of spouses for certain debts.
2. Types of Debt and Their Handling:
- If a mortgage has co-borrowers, the surviving borrower is responsible.
- A life insurance policy can cover the remaining balance to avoid burdening the co-signer.
Credit Card Debt:
- Joint account owners are responsible for the balance.
- Authorized users are not liable for credit card debt.
- Credit card companies can make claims through the estate if accounts are in the deceased's name only.
Student Loan Debt:
- Federal student loans are discharged upon the borrower's death.
- Private student loans may not be discharged, and the estate may be used to settle the debt.
- Co-signers may be immediately responsible, but a life insurance payout can be utilized.
Car Loan Debt:
- Options include letting the lender repossess, selling the car, or continuing to pay off the loan.
- Co-borrowers are responsible for the car loan debt.
- Medical bills persist after death.
- The care provider or collection agency may pursue recovery from the estate.
- In the case of a child patient, parents may be responsible.
3. Life Insurance and Debt Coverage:
- Life insurance can be a crucial tool to cover debts, ensuring financial stability for the family.
- Calculating the appropriate life insurance coverage involves considering all types of debts listed in the article.
4. Additional Insights:
- Community Property States: Understanding the unique rules in states like Arizona, California, Idaho, etc., is essential.
- Debt Negotiation: In certain situations, negotiating with lenders or seeking advice from debt relief attorneys can be beneficial.
In summary, having a comprehensive understanding of how different debts are handled after death is crucial for making informed decisions about the amount of life insurance needed to safeguard your family's financial well-being. It's not just about the amount you owe, but also about ensuring your loved ones are not burdened by financial obligations.