This guide walks you through what happens to debt when you die. Here, we'll answer your questions about debt after death, and explain how life insurance can help protect you from creditors.
It's a simple question with a nuanced answer. However, not all debts are forgiven at death.
Different types of debts have unique rules attached to them regarding responsibility. Depending on the structure of the loan, your spouse, co-signers, and sometimes your estate, beneficiaries can be responsible for debts.
Scenarios where others may be responsible for your debt at your death
Debt doesn't explicitly pass to a beneficiary. However, others could be held responsible for your debt upon your death, including
There are two primary types of debt - secured and unsecured. A secured debt is tied to an asset, like a home or car, and the lender has the right to repossess the property to pay off the balance owed. Unsecured debts, like credit cards and unsecured personal loans, aren’t tied to an asset.
If you have unsecured debt, creditors also have the right to collect on the debt from your estate upon your passing. Consequently, your estate's assets must first clear debts before beneficiaries can take control. At times, estate beneficiaries must sell off the estate's assets, such as a home or vehicle, to pay for the debt.
There are three main scenarios for mortgage debt after your death:
Here's what to expect with credit card debt after death:
When you pass away, auto loan debt, is treated like a mortgage:
If you have federal student loan debt, it is discharged when you die. However, private student loan debt is treated like credit card debt: First, any co-signer on the loan becomes responsible. If there's no cosigner, the lender attempts to recoup payment through the estate's assets.
Medical bills don't always go away upon your death. When a child passes away, the parents are held responsible for medical debt. Meanwhile, the debt of an adult can be passed to the estate and, in some states, to a surviving spouse.
Approximately 30 states have a filial responsibility law requiring long-term care debt to be paid by the family. It's best to understand your medical expense level and your state's laws, knowing your estate will likely be held responsible.
Creditors can't touch your life insurance benefits. And that helps your beneficiaries.
In cases where your home must be sold to pay for other debts, whether credit card, personal loans, or medical bills, a life insurance policy can provide cash to cover the debts and allow your beneficiary to take ownership of the home.
If your life insurance policy is enough to cover all debt and outstanding mortgage, your family won't have to worry about creditors calling or managing a monthly mortgage payment.
A simple rule for the amount of coverage needed in your life insurance policy is D.I.M.E. Simply add together any debt, lost income, your mortgage balance, and future education expenses for surviving children. This amount of coverage could protect your family financially in the event of your passing.
Explore life insurance 101 with Ethos Life and learn how a policy protects your family. Get a quote today for life insurance online and access our easy-to-use calculator to calculate your coverage needs.