When used appropriately, a life insurance policy can be a cost-effective tool that helps our families carry on with financial stability after we are gone. But it’s not always easy to know just how much you need. The general rule of thumb has been you get enough coverage to pay for your children’s education, provide income supplementation to your spouse, and to pay off debts. Knowing how much debt you have and when payments will be due is an important step in determining how much life insurance coverage you would need to pay off your family’s debts.
A home mortgage is often the largest debt that Americans have. If you’re a homeowner, or considering buying a home soon, getting a life insurance policy will help ensure that your family can continue to pay off that debt in the event that you pass.
If you die unexpectedly, having a life insurance policy can mitigate the mortgage debt and keep your family stable in their home life. To learn more, read about life insurance tips for homeowners.
Over the past twenty years, student debt has become more prevalent, particularly in Gen X and Millennial households. In aggregate, there is over$1.5 trillion in student loan debt in the United States. Insuring your personal student debt can be particularly tricky, but life insurance can help.
Student loan debt becomes a debt of the estate, except in the case of federal student loans, which are automatically forgiven at death. This also includes Parent PLUS loans, which are forgiven if either the student or the parent passes away. Fortunately, this type of debt equates to roughly $1.4 trillion of the total amount.
However, many Americans hold private student loan debt, much of which is not discharged upon death but becomes the responsibility of the estate, or the co-signer. Life insurance can help pay off any existing student debt and relieve your family of that financial burden.
Another category that can wreak havoc for your family is consumer debt, which includes credit card balances and auto loans. In 2019, Experian found that the average per person’s credit card debt was $6,028. If you pass away with this type of debt, your estate would have to repay it. Further, if you helped a family member co-sign for a credit card and they pass away, you would be liable.
Auto loans are also not forgiven at death, so whoever inherits your car must decide whether to pay off the loan or refinance it in their own name.
Consumer debts could ultimately deplete an estate and leave little for your family.
Life insurance can be a great way to help mitigate the negative impact debt can have upon your death. Calculating it correctly will require you to do a little homework.
First, create a basic spreadsheet or debt budget, listing all your debt, from mortgages to student loans to credit cards, etc. Then calculate the total. Once you have this number, multiply it by 1.5 to cover any future debts you take on. This is a good exercise to do annually.
Second, review the death provisions that come with all of these debt agreements. You may find that many debts will terminate at death, but don’t cross them off the list until you’re sure that they really won’t become part of your estate.
Finally, you need to note the ownership of the debt. Who would be directly tied to your debt, and if it’s shared debt, do you have the right coverage in your plan to protect them?
Your life insurance needs may change over the course of your lifetime, but the biggest financial mistake would be to do nothing at all. Here’s a handy calculator from Ethos to get started.