3 Reasons You Need Life Insurance if You Have Debt

By Sa El, guest contributor. October 16, 2020

Paying off debt can be a real hassle, but what would be even worse would be leaving your family with the responsibility to pay off your debt. 

There are some fundamental reasons you need to have coverage on your life if you have any debt.

Below I will list why you need life insurance if you have debt and what would happen if you fail to place coverage before you die. 

Your Spouse Could Be Held Responsible

If you pass away, your debt could transfer over to your spouse, especially if you took on any liability as joint or co-borrowers, or live in a community property state. 

It doesn't help that 73% of adults had an average debt of more than $61,000 when they died. If your spouse becomes responsible for this debt, it could ruin their financial future.

Co-Borrowers Are Still Responsible 

If you have co-signed debt, like a mortgage loan, auto loan, or even a private student loan, your death won't stop the debt from being transferred to the cosigner.

Some clauses even require the co-signer to pay off the balance immediately upon the death of the primary borrower.

That process is called the automatic default clause or provision, and you should review any co-signed debts to make sure there isn't one in the contract.

If you are the co-borrower on any type of debt, having a life insurance policy is an absolute must to take care of any debt that could be lingering. 

Debt Owed In A Community Property State

If you live in a community property state, life insurance is absolutely needed if you plan to protect yourself or your spouse.

The states that have community property provisions are:

  • Arizona
  • California
  • Idaho 
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

In a community property state, any debt incurred by either you or your spouse during your marriage is owed by the "community."  (This does not affect the debt incurred before or after the marriage, but only during the marriage.)

This holds true even if the debt was only signed for by one spouse; this makes the debt responsibility in a community property state much higher than most.

Your spouse could potentially be responsible for your private student loan debt if you took out the loan while you were married. (Some private student loan lenders forgive debt if the borrower dies, but this is not always the case. Be sure to check your loan documents.)

An Inheritance Would Be Taken First

Your estate is going to be held responsible for any debt you racked up by the time of your death.

This means that if you plan to leave an inheritance to your family, then you will absolutely need the benefits of a life insurance policy to cover the costs of the debt, so they don't eat up your family's inheritance.

And here's the thing:

If there isn't enough money in your estate to pay off the loans, it will become insolvent, and the estate will have to go through probate to determine which debts are paid.

Another reason life insurance is perfect for this situation is that it isn't subject to probate and goes directly to the beneficiary. Important: life insurance will be distributed to beneficiaries. Make sure yours are up to date.

So, even if there isn't enough money in your estate to cover your debt when you die, your family can survive with your life insurance policy.

You don't want to take your family through the process of losing everything in probate and only being left with a debt that they can't pay back.  

Your Family Could Lose Their Home

If you pass away without life insurance, you could put your family in a situation where they lose their home. Your family could be forced to sell the home to pay the mortgage. Or they may not be able to afford the cost of staying in the home, including a mortgage, property taxes, insurance, utilities and upkeep.

The easiest way to avoid this concern is to have an insurance policy that covers the term length of the mortgage and amount of the mortgage. And don't forget about those other costs!

Taking Action

If the most important thing for you to do is protect your family financially, then you need life insurance if you have debt. No one wants only to leave their family with debt or make it harder for them to have a healthy financial future.

There is no need to wait, you should get some life insurance fast to make sure both your family and their future are protected. 

About the Author

Sa El is the Co-Founder of Simply Insurance and a licensed Insurance Agent with over 12 years of experience in the industry.  He specializes in Life & Health Insurance and is certified in Long Term Care Insurance in the state of Georgia. He is also an Official Member of the Forbes Finance Council. 

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