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One of the main reasons for buying life insurance is to help you pay off your debts when you die. You don’t want to burden your family with expenses that they might not be able to afford without your financial support.

But do you need a life insurance policy with a death benefit large enough to cover? all you have to? Not necessarily.

It is important to know how the different types of debt are handled after death. This will help you determine the amount of life insurance you need to cover outstanding debts.

How Debt Is Managed After Death

Debt doesn’t just go away when you die. But that doesn’t necessarily mean that someone else has to find a way to pay off all of your debt. Creditors can collect what is owed on your estate.

Typically, creditors have a certain amount of time after you die and after the probate process starts making claims for what you owe, says Josh Berkley, estate planning attorney at Berkley Oliver PLLC in Kentucky. .

Probate is the legal process in which the assets of your estate are distributed and debts are paid. Property and assets that were only in your name are considered part of the estate and can be used to pay off your debt, says Berkley.

However, there are situations where your loved ones may be responsible for paying off some of your debts.

• If you have a co-signer on a loan or line of credit, the co-signer will be responsible for paying off the debt after your death.
• Your state’s law may require your spouse to pay certain debts.
• If you live in one of the community property states, your spouse might have to use property that you jointly owned – rather than property that was only in your name – to pay off your debts. Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin are common law states. Alaska has a voluntary community ownership system.

The type of debt you have can also affect whether it should be paid after you die. Here’s how these common types of debt are typically handled.

What happens to mortgage debt

If you and someone else, such as a spouse or partner, took out a mortgage together, what happens to that debt is straightforward.

“The surviving borrower is responsible for the loan,” says Leslie H. Tayne, a debt settlement lawyer in New York City. If you don’t want to leave the co-signer on the hook for the remaining balance, a life insurance policy can help cover the cost. So take the amount owed on your mortgage into account when calculating the amount of life insurance you need.

If there is no co-signer on the mortgage, no one should assume the obligation. However, this does not mean that your family can inherit the property freely and clearly. If they want to keep the house, they will have to take responsibility for the loan, Tayne says.

Even if they want to sell it, they will have to keep making mortgage payments until the house is sold. And the remaining mortgage debt will have to be repaid once the house is sold.

If no one takes over the mortgage after you die, the bank can foreclose the property, Tayne says. He can then sell it to recover the amount owed on the mortgage.

What happens to credit card debt

If you have credit card accounts with an account co-owner, the co-owner will need to pay the account balance.

Be aware that a co-owner is different from an authorized user whom you have authorized to use your credit card. An authorized user will not be responsible for your credit card debt. If you have credit card accounts in your name only, the credit card companies may ask to be paid through your estate.

“If there is no estate, no will, and no assets – or not enough to meet those debts after death – then the debt will die with the debtor,” says Tayne. “Children or other parents have no responsibility to pay debts.”

What Happens to Student Loan Debt

You are in luck if you have federal student loans because they will be paid up if you die. This means that they will not have to be paid. Any PLUS loan your parents took out to pay for your college education will also be released if you die. A family member will need to provide your loan manager with a death certificate to prove your death and to pay off the loans.

You are not so lucky if you have private student loans.
“There is no official release of private student loans, unlike federal student loans where the debt dies with the debtor or the student borrower,” says Tayne. If the loans are in your name only, the assets of the estate can be used to pay off what is owed if the lender does not pay the debt.

If you have a co-signer on a student loan, that person will be responsible for what you are owed. In fact, some lenders include clauses in their contracts that require the balance to be paid immediately if a co-borrower dies, Tayne says.

Of course, a life insurance payment could be used to pay off what is owed. However, the co-signer might be able to negotiate with the lender to change the contract after the death of the other co-signer. It might be helpful to work with a debt relief lawyer who has experience negotiating with lenders in this situation.

What Happens To Auto Loan Debt

Your family will have a few options for dealing with any debt you owe on a vehicle:

• They could let the lender repossess the car if they don’t want to.
• They could sell the car to pay off the loan.
• Or they could keep the car by continuing to pay what is owed on the loan.

However, they will likely need to qualify as a borrower to maintain loan terms or apply for an entirely new loan, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.

Of course, if there is a co-borrower on your car loan, that person will be responsible for the loan. This is another debt that you should factor into your calculations when determining how much life insurance to purchase.

What happens to the medical debt

Unfortunately, medical costs do not disappear when you die. The care provider or collection agency will have to decide how to get the money back. If you owe only a small amount, the vendor can declare the invoice uncollectible and close the account, McClary says. If you owe a lot, he might try to collect what is owed on your estate.

Medical debt is the only type of debt where there is usually no co-owner. The patient is responsible except in situations where the patient is a child. Then the parent would be responsible for the bill, McClary says. In such situations, a life insurance policy on a child could help cover the bill.

Add up your debts

Consider all of the types of debt listed above to determine the amount of life insurance you need.

Remember that while your family may not have to use their assets to pay off what you owe, the assets that need to be taken out of your estate to cover your debts will leave your loved ones with less. A payment from a life insurance policy could be used instead to cover your debts so that your property does not have to be sold and the assets do not have to be drained.