Should You Pay Debt From an Insurance Policy When Someone Dies?

A life insurance policy provides cash to the named beneficiaries when someone dies. Generally, when purchasing life insurance, the holder has a specific purpose in mind for the money. Most parents purchase it for themselves so they can provide for their children after they pass away. Life insurance policies are separate from an estate and do not have the same regulations and taxes as an estate has.

Insurance Policy Goes to Named Holders

A life insurance policy will be paid in full to the individuals listed on the policy. The money from the policy is not included in the final estate or considered when it comes to unpaid debt or credit card bills. The recipients can use the money in any way they wish without fear of the credit card companies demanding it be used to repay the decedent's debts.

Estate Stands for the Debt

When someone passes away, the estate must stand good for all of the debts incurred by the deceased. This means that any money in savings, investments and property that the decedent owns must be sold and the proceeds paid toward the debts collected. If your spouse dies and he had outstanding credit card debt, the estate may be required to sell the house and take half of the money to apply toward outstanding debts. Often, if this is the case, the creditors will work with you on setting up a payment plan.

Unpaid Debt Is Forgiven

Once the estate is liquidated and the money divided among creditors, any outstanding debt is forgiven. The executor of the estate will need to mail a copy of the death certificate and a letter stating that there are no remaining assets to cover the debt. The unpaid debt will be forgiven. If a cosigner on the debt is still alive, she will become responsible for the debt.

Deciding to Pay the Debt

If your spouse dies and you both owned your home, you may be forced to sell it to pay off the outstanding debts. Similarly, if you are a cosigner on any of the debts, you will be held liable for those debts. Under these circumstances, it makes sense to use the life insurance money to pay off the debts. This will allow you to keep the home you are currently living in and prevent you from having your wages garnished if you cannot meet the payments.