Apr 8, 2022•7 min
Can Life Insurance Help Your Debt?
At times, getting in debt is a necessity. If you have a mortgage, for example, debt certainly isn’t a bad thing. Other times, you may need to borrow unexpectedly to cover costs that were previously unplanned. Either way, debt generally doesn’t need to be a concern as long as you can manage the repayments comfortably. But what happens to your debt if you die? In this guide, we’re looking at life insurance for debt and how it can help your loved ones financially after you’re gone.
What happens to your debt when you pass away?
Talking about death isn’t exactly a fun topic. Throw in debt, and you’ve got yourself a double whammy of things no one wants to discuss. Ever. Ignoring death and debt, however, can leave your loved ones in financial difficulty should the worst happen to you.
That’s because your debts don’t magically disappear if you pass away. Instead, they go to your estate, which is then used to pay off any debts you might owe. But what happens if your estate doesn’t cover everything? Or, perhaps you don’t want the things you leave in your will to pay off the debts–a house, for example.
Then there are cosigners. If you’ve cosigned something but pass away, the other person becomes liable for the debt. All of these scenarios could see the people you leave behind burdened with significant debt.
So, what’s the answer? It might just come in the form of life insurance.
Life insurance for debt: can it help?
A life insurance policy can help with debts you owe. Its death benefit goes to the person named as your beneficiary and therefore will help them pay off any debts you might still have when you pass. It can act as a cost-effective method that allows your family to carry on with some financial stability.
The amount you decide to get in coverage may depend on the debt, though there are plenty of other reasons for getting life insurance (more on that in a bit). Essentially, life insurance can help in several ways, including paying debts.
What debts can life insurance help with?
A mortgage is one of the most common debts held by Americans. It’s also the largest, as buying a home will probably be the most expensive purchase you ever make. It’s also more likely to have a cosigner with a mortgage, especially if you’re buying with your spouse.
If you passed away unexpectedly, your spouse would be liable to pay the entire mortgage. Even if they can afford to cover the payments, it’s unfair to shoulder that extra financial burden on them, as it would mean more money coming out of their pocket.
You can avoid such a scenario with a life insurance policy as the death benefit can cover the mortgage repayments. A mortgage is one of the key reasons people get life insurance coverage, and if you have a house with a mortgage, looking into a policy should be right at the top of your list.
Credit cards and loans
In an ideal world, we would all be credit and debt-free. Unfortunately, that’s not how things work, and the average American debt totals a whopping $52,000. Of course, that includes a mortgage, but it still all adds up.
Average US credit card debt stands somewhere at around $6,000-plus. It’s a considerable amount, especially if you suddenly passed away and left the money owed to a cosigner. Automobile loans also aren’t forgiven at death, so you could pass on a significant amount of debt to your family paying, leaving them to pay for the credit card and the car.
Fortunately, life insurance also covers your credit and other loans. If you have a policy in place when you pass, your beneficiary can use it to pay off any debts you left behind, making their life easier (at least financially) in the process. It can also work well if you own a business, and you’ve cosigned debts with your business partner.
Life insurance can help with student loans, which has become one of the most common debt themes among millennials and Gen X. There is over $1.5 trillion in student debt in the US, and it’s typically one of the harder debt types to cover yourself against when borrowing privately.
Federal student loans are forgiven at death, but any private money owed becomes a debt of the estate. If you owe this type of debt, your cosigner or estate needs to pay, but a life insurance policy can ensure that everything is taken care of and help pay off the existing student debt.
Which type of life insurance policy should I get?
So, we’ve established that life insurance can cover all sorts of debts should you pass away, but which policy should you get? There’s more than one type of life insurance, and it’s worth knowing how the primary options work.
A term policy is a form of life insurance that lasts for a specific amount of time, usually between 5 and 30 years. If you die during the period you’re covered, your beneficiary will receive a death benefit. However, once the term ends, you’re no longer covered–and if you wish to renew, you will need to do it at the renewal age. That will likely mean paying a higher premium as you will be older than when the policy was first taken out.
Group life insurance is often provided by employers and gives you some form of coverage. However, the amount you’re covered for is usually limited, meaning it’s probably not enough to leave a significant sum to your beneficiary–especially if you have significant debts that need taking care of. Think of group life insurance as a handy bonus, but it’s always worth getting an individual policy on top.
Now, this is where things get interesting. A permanent life insurance policy gives you a death benefit, just like term coverage, but it also has accessible benefits while you’re still alive. Alongside the death benefit is something called “cash value.” The cash-value element lets you build wealth while you’re still alive. How does it do that? When you pay into the premiums, you’ll cover the death benefit and the cash value. The cash value can be invested in a high-interest savings account or equities that you choose. This amount grows over time and you can access the money you’ve accumulated later on in life. That means it can be a great little retirement top-up or even pay for your kids’ or grandkids’ college. Unlike many other savings accounts, it also grows tax-free, so you build wealth without giving the taxman a significant chunk of the money you’ve accrued.
Now, this is the best of both worlds: A combination policy is essentially a permanent and term policy, which means you can save for your future while protecting you and your family from temporary debt, such as a mortgage or student loans. This way, you can lock in a low rate at a young and healthy age today, and build wealth and protection all while staying on budget. Take a look at some combination policies today.
In conclusion: Planning for every scenario with life insurance
Life insurance works well to safeguard your loved ones against debt. And if you opt for a permanent life insurance policy, you can see to it that debts are covered if you pass while also having the opportunity to build wealth when you're still alive. You may even decide to use the money you accrue to pay off debts, so your family doesn't have a dime to pay if the worst happens to you. No matter what angle you come at it from, life insurance for debt is a smart way to ensure that finances are covered and that your family is well looked after.