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What Happens to Your Debt if You Die Without Life Insurance? – The Motley Fool

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Life insurance can provide money to repay creditors — but wha…….

Image source: Getty Images

Life insurance can provide money to repay creditors — but what happens if there is no policy in place?

Key points

  • It’s not unusual for people to have debts at the time of their passing.
  • The proceeds from a life insurance policy can provide funds to repay debt.
  • If someone dies without life insurance, some debts may still have to be paid.

Many people owe money to creditors, and when they pass away, that debt doesn’t necessarily just disappear. As a result, it’s important to understand what happens to it — especially if someone dies without a life insurance policy.

What are the rules for debt after death?

When someone passes away, the consequences for their creditors vary depending on the situation.

If the debt was jointly held, such as when a couple takes out a mortgage loan together, the surviving spouse will be responsible for repayment.

If there is collateral attached to the debt — such as a home, which acts as security for a mortgage — it’s also not possible for heirs to take the asset without repaying the loan. That’s true even if the debt wasn’t joint debt. The loan balance must continue to be paid, either out of the estate proceeds or by co-owners or heirs who inherit the house. Otherwise, the lender will begin foreclosure or repossession proceedings.

If there is unsecured debt with no collateral, though, then things become a bit trickier. Creditors can make a claim on the estate and try to collect the debt by taking a share of the deceased person’s property. But if there are no assets in the estate to pay any remaining bills, heirs who don’t share joint legal responsibility for the debt do not have to pay it. The debt just goes unpaid.

Do you have to pay debt with life insurance proceeds?

If there is a life insurance policy, it is possible that some of the proceeds of that policy could be used to repay debt. But there’s not necessarily a requirement that this happen.

A person who buys life insurance will name beneficiaries who receive a payout upon death. The beneficiaries get this money and they do not have to use it to pay back the deceased person’s debts if they …….


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