Life insurance is a poignant option for many people, not only to ensure that they leave something behind for their family, but also to help deal with any debt and final expenses. Yet according to a new survey from CreditCards.com, 1 out of 5 people in the United States believe that their debt will never be paid off. Living in debt can be crippling. Dying in debt? Even more troubling.
Who is responsible for your debts after you die?
After your death, your estate becomes responsible for your debts. Your estate is everything you own when you die. The process of making payments for your bills and distributing what remains is called probate.
The person who has the responsibility of dealing with your will and estate after your death, known as your executor, will pay off your debts with your assets. This could include writing checks from a bank account or getting money to pay off your debts by selling off property. If sufficient money is not available to cover your debts, it means that creditors are out of luck.
However, certain types of debts have their own issues. In some cases, you may require life insurance to help others pay off their debts.
Home-equity Loans and Mortgages
When a property has a mortgage, it means that the lender is protected by a certain level, at least up to the property’s value.
However, according to federal law, lenders are not allowed to force a joint owner to pay off the mortgage immediately after another co-owner’s death. This is also applicable to any family member who inherits the home and lives in it. This means that the co-owner or family member can simply take over the mortgage payments.
In cases of an outstanding home-equity loan against the property, the scenario is completely different. It is allowed for a lender to force a co-owner, family member, or anyone who inherits a home, to repay the loan immediately. In such cases, selling the house could be required. That said, lenders may also work with new owners, allowing them to simply take over the payments on the home-equity loan.
Credit Cards
As soon as the estate no longer has assets, the luck runs out on credit card companies, because assets do not secure credit card debt the way they secure car loans and mortgages. Any holder of a joint account would be responsible for the bill, but authorized credit card users would not.
In states with community property, the responsibility for any debt, including credit card debt, incurred during the marriage goes to the spouse.
Auto Loans
The lender has the right to repossess the car in the case of a vehicle that is not fully paid off. However, typically the person who inherits the vehicle can simply continue to make payments, and it is unlikely that the lender will take action.
Student Loans
If the estate is unable to or not ready to repay other unsecured obligations, for example student loans, due to unavailability of assets, lenders have no recourse. Additionally, upon your death, federal student loans are discharged.
According to the Federal Trade Commission, if your family members are not responsible for your debts, it is possible for collection agencies to legally call to discuss debts and to try to find an authorized person to pay them. However, collectors cannot mislead family members into thinking that the debts are their responsibility.
Caveats
There are circumstances in which the responsibility for your debts would be given to family members, spouses, or other people. Some of these are as follows:
- Co-signed for a loan.
- Are joint account holders.
- Are spouses in community property states – California, Arizona, Texas, Idaho, Nevada, Washington, Louisiana, New Mexico, and Wisconsin. If debts predate the marriage, spouses are not responsible. However, fifty percent of any community property that has been received through a marriage could be used toward clearing such obligations.
There are about 30 states that have “filial responsibility” laws that could give responsibility to adult children for debts related to caring for parents. Responsibility for debts that are related to child care could be given to parents as well. In the past, the enforcement of these laws was rare, but in recent years, there have been cases in which the statutes have been used by creditors to pursue family members for the repayment of debts.
What is Protected?
Typically, creditors are not permitted to go after your life insurance proceeds or retirement accounts. Those are not part of the probate process and will go to the beneficiaries that you have named. But if the named life insurance beneficiaries are no longer living, your estate may receive your death benefit and can be subject to creditors. That is one reason why naming the proper beneficiaries in your policy is important.
There are many scenarios in which life insurance can help. Term life insurance policies are suitable for most people’s life insurance needs. These policies provide a death benefit for a set number of years. You should consult a financial advisor if you are considering a permanent policy, like whole life insurance.