Paying Off Debt Using Life Insurance

Paying off debt may be financially and emotionally exhausting, and it's not something you'd want your loved ones to take on after you're gone. The good news is that debts are rarely inherited, so the people you care about are unlikely to be saddled with the cost. However, there are times when an outstanding amount becomes the responsibility of someone else. In such cases, you can obtain a life insurance policy to cover the amount you owe, and the payoff can assist your beneficiaries in paying it off.

According to a new NerdWallet survey, 35% of Americans who purchase life insurance do so to cover major debts for which others would be liable. Learn more about how debt is handed down through families and what types of debt you may wish to address.

What Happens To Your Debts When You Pass Away?

When you die, the assets in your estate are often utilized to pay off your obligations. If the estate has insufficient money to satisfy the obligation, it is not paid. However, other parties may be held liable for the outstanding debt in some cases.

Cosigners & Joint Owners: If someone cosigns your debt, they are usually liable for it after you pass away. A dual owner of the debt is also equally liable for it. So, if you or a joint owner die, the remaining member is responsible for paying off the debt.

Spouses: In states where community property exists, surviving spouses are liable for obligations left by dead partners. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Elective community property regulations exist in Alaska, South Dakota, and Tennessee. In some states, spouses may be held liable for certain obligations, such as health care.

Even if no one is legally obligated to pay your bills after your death, you may still desire coverage. A life insurance payment might assist your beneficiaries in repaying debts so that the money in your estate can be distributed to your heirs. You may also employ life insurance to leave your estate with a separate legacy.

Debt Protection- Term Or Permanent Life Insurance?

Term life insurance is usually sufficient for most families and is a popular way to settle the debt. These policies are intended to endure for a defined amount of time, such as 10 or 20 years. You can select a term length that corresponds to the length of the loan. If you have a 20-year mortgage, for example, you can get a 20-year term life policy.

Permanent life insurance is the other sort of life insurance. These plans, unlike term life insurance, are permanent and can last your whole life. A perpetual policy, such as whole life insurance, maybe a suitable option if you want your beneficiaries to receive the death benefit regardless of when you die. Permanent insurance, on the other hand, are more expensive than term life policies, and you may not require perpetual coverage.

What Types Of Debt Are Covered By Life Insurance?

Beneficiaries can spend a life insurance death benefit any way they see fit, including paying off debt. Mortgages, credit card obligations, and personal loans are just a few types of debts that an insurance policy might assist cover after you die.

Paying Off A Mortgage Using Life Insurance

If you cosigned your mortgage or were a co-borrower on the loan, they would be liable for the debt if you died. Making them the beneficiary of a life insurance policy allows them to pay off the mortgage and keep the residence.

If no one is liable for the loan and your estate lacks the cash to satisfy the mortgage, the lender may foreclose on the property. However, if a person inherits a property and wishes to keep it, they are usually permitted to continue making mortgage payments. If this occurs, a life insurance payment can assist them in covering the costs. Even though your heirs are not legally obligated to pay the mortgage after your death, they may profit from a life insurance payout.

Term Life Insurance Vs. Mortgage Protection Insurance

Mortgage protection insurance is an extra policy offered by lenders when you buy a house. If you die with a mortgage amount, these plans pay it off. The money is paid to the lender, not to your family.

Term life insurance is frequently less expensive than mortgage protection insurance and offers the same coverage with more flexibility. A term life insurance payout is made to your life insurance beneficiary and can be utilized for any purpose.

Paying Off Student Loans With Life Insurance

Because student debt is frequently forgiven after death, life insurance may not be required.

For example, if you take out a federal PLUS loan for your child's college expenses and then die, the obligation is canceled.

Even if you cosign a private student loan, you may not be liable if your child (the borrower) dies. This is due to the Economic Growth, Regulatory Relief, and Consumer Protection Act, which mandates lenders to remove cosigners from any duty to pay off the debt if the borrower dies after 2018.

If your child relies on your salary to pay off their student loan and you die, a life insurance payment can assist them in covering the debt in your absence. If you take out a private parent loan for your child, you should also consider purchasing life insurance. These debts are often not dismissed if you (the borrower) die, which means the obligation will be included in your inheritance. The proceeds from a life insurance policy might be utilized to pay off debt rather than your assets.

Paying Off Credit Card Debt With Life Insurance

A cosigner or joint owner of your account may be responsible for the remaining debt on your credit cards. Purchasing a policy to cover the amount you owe might assist your beneficiaries in repaying it if you die. Authorized users, such as partners or children, who have access to the account's credit cards, are not liable for the debt.

Term life insurance vs. credit life insurance

Lenders may provide credit life insurance, but it is not necessarily the best or cheapest alternative. In these policies, the death benefit reduces as the debt is paid off, but your insurance premiums remain constant. Furthermore, the death benefit is paid to the lender to satisfy the loan rather than to your beneficiaries.

In comparison, term life insurance pays money to your beneficiaries rather than the lender. Furthermore, the death benefit is often not reduced while the loan is paid down, so your beneficiaries receive the whole amount if you die within the policy's term.

Paying Off Company Loans With Life Insurance

Following your death, the payoff from a life insurance policy might assist your company partners in repaying any loans for which they are now exclusively liable. Even though your partners are not expected to repay the loan, a life insurance payment can assist in covering expenses during a difficult period. A buy-sell arrangement, which permits partners to buy out the dead partner's ownership in the firm, can also be funded by life insurance.

What Amount Of Life Insurance Do You Require To Settle Your Debt?

To determine how much life insurance you require, use our debt calculator.

Getting a policy isn't just for covering significant bills. Here are some more popular reasons for purchasing life insurance.

•Utilizing life insurance to supplement your income

•Burial insurance is used to pay last expenditures.

•Purchasing life insurance as a form of investment

•Using life insurance to leave a legacy