Debt is a stubborn foe. It hangs on right up until the very last dollar has been repaid, often accruing interest the entire way. And as if that weren’t enough, debt often stubbornly lives on even after the borrower dies.
“Generally, our debts are not wiped away when we die,” says Erik Kroll, a Certified Financial Planner and owner of Student Loans Over 50.
Instead, he says, outstanding debts often become someone else’s problem. In many cases, your estate is left on the hook to settle remaining debts. In other cases, your surviving spouse, co-borrower or co-signer may be obligated to pay.
When your debts outlive you, they can create additional financial and logistical challenges for your surviving family members. This also means your assets may be turned over to debt collectors instead of passed on to your heirs, which can eat away at the inheritance you’d intended to leave behind. Your spouse or other family members may also be saddled with bills they can’t afford—which could threaten their financial plans and lifestyle.
Fortunately, you can take measures now to help protect your loved ones and keep them on stable financial ground. Chief among them is life insurance, which can help insulate your loved ones from the impact of the debts you’ve left behind. In fact, debt is one of the big reasons why many people get life insurance.
We’ll explain what happens do debt after you’re gone, how life insurance works and whether it might be a good fit for you.
If you’re the sole account holder on a credit card, any remaining balance will be paid by your estate. If the debt exceeds what your estate can pay, the credit card company suffers the loss. However, if the account is jointly owned—by you and your spouse, for example—your joint account holder bears the responsibility of paying off the balance.
Keep in mind that joint account holders are different from authorized users. If another person is simply named as an authorized user on your credit card, the debt remains with your estate and doesn’t pass to that other person.
If you die before your mortgage is paid off and the mortgage is in your name only, your estate is responsible for paying the mortgage. If you and your spouse owned the home jointly, your surviving spouse will take over the mortgage and be responsible for making payments. And if you leave the house to heirs before it’s paid off, the mortgage becomes their responsibility. If the mortgage goes unpaid, your loved ones will have to either sell the house to pay it off or face foreclosure.
Federal student loans are forgiven when you die, whether the loans covered your own education or you took them out on behalf of your child. Unfortunately, private student loans are different, and typically your estate or co-signer will be held responsible for them.
“If you die with significant outstanding federal student loan debt, that debt is wiped away and forgiven,” Kroll says. “Otherwise, it is at least up to your estate to pay off the loan. This can mean less money than you wish passing to your heirs.”
Your estate is responsible for paying any remaining amount due on a car loan in your name. But if you bought a vehicle with a co-borrower or co-signer, the other party will assume responsibility. If your estate doesn’t have enough funds or payments aren’t made, your lender could repossess the car.
Anyone who inherits the car will have to either make the car payments or sell the car to pay it off.
Typically, any outstanding medical bills will come out of your estate. But this type of debt can be complicated, and in some states your spouse may be held responsible for paying the bills.
As Benjamin Franklin once famously wrote, “… nothing can be said to be certain, except death and taxes.” And it holds true. In fact, taxes don’t go away even after you die. If you owe back taxes or have any unfiled tax returns from previous years, the amount owed will come out of your estate. Typically, tax debt doesn’t pass on to your surviving relatives, but paying it out of your estate could diminish the inheritance they otherwise would have received.
No matter how diligent you are about making payments, you may not be able to eliminate all debt from your balance sheet within your lifetime. Significant debt may take years to pay down, and there’s no way to guarantee the number of years you’ll have to earn income and make payments.
Fortunately, there are a few important measures you can take now to help protect your family’s finances.
A life insurance policy can help build protection into your financial plan. Life insurance policies come in different forms, such as term or whole life policies. A whole life policy pays a death benefit to your beneficiaries upon your death no matter when you pass away, while term life insurance covers your risk of death during your coverage term, which typically lasts for 10 years, 20 years or 30 years.
Financial attorney Leslie Tayne says the payout from a life insurance policy can help cover funeral expenses, estate costs, debts and taxes—plus provide money for your beneficiaries to cover their living expenses, pay for college and more.
“Life insurance can help protect heirs and ensure they aren't saddled with expenses, along with giving them a boost to life financially for what would have been provided if the decedent was still alive,” she says.
At the end of the day, you might ask yourself: If you were no longer around, could your family keep up with mortgage payments, or might they be forced to sell the house? Could they keep up with your car payments? What about your student debt? If your loved ones would be burdened by your debt load after you’re gone, life insurance could be a good fit.
Keeping a cash buffer that you dip into only for true emergencies can help you stay on track when unexpected costs arise. With some savings in the bank, you’re less likely to have to rely on credit cards or loans. Plus, if you pass away, then your heirs could use that emergency fund to help pay off debts or other liabilities.
Before you sign on the dotted line, give some careful consideration to serving as a co-signer or joint account holder to help someone else secure a loan or line of credit. While you may want to help a loved one secure financing, there’s a chance you could be tasked with paying the debt yourself one day—and that’s a responsibility you should be fully prepared for.
Debt may be notoriously long-lived, but it doesn’t have to throw your loved ones off-course if you were to pass away before you’ve made your last payment. By taking action now, you can bolster your family’s financial security and help ensure they’re left with the help they need in your absence.
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Accidental Death Insurance policies (Form VL-ADH1 with state variations where applicable) and Term Life Insurance policies (Form ICC16-VLT, ICC19-VLT2, and CMP 0501 with state variations where applicable) are issued by Vantis Life Insurance Company (Vantis Life), Windsor, CT (all states except NY), and by The Penn Insurance and Annuity Company of New York (NY only). Coverage may not be available in all states. Issuance of coverage for Term Life Insurance is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Policy obligations are the sole responsibility of Vantis Life.
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