Can life insurance be used to pay off debt?

It's not uncommon to accumulate debts during your lifetime, especially in cases where you are unable to make a large payment upfront. But for many people, managing debt can be an uneasy feeling.

A 2023 report from Citizens Advice found that "one in four people in the UK are currently behind on at least one bill." It also determined that "energy debts and council tax arrears are the most commonly encountered debts."

Some people opt for life insurance as a way to protect their family financially if they should die. In some cases, it could help to cover certain costs. But what about debts that could become their responsibility if the policyholder passes away?

In this article, we'll explain how life insurance could be used to cover debt as well as which types of cover could be useful.

What will happen to your debts if you die?

When you die, not all your debt will disappear. Some will remain fully repayable, even if you aren't around to pay. This can include any personal loans, credit cards, and your mortgage balance.

Normally, the money from your estate will be used to pay towards your debts. This includes any assets you own, such as money, shares, property, possessions, etc. However, in the case of a mortgage, this may be unlikely, in which case, a life insurance policy could help.

Death can affect debts in different ways. Joint debts, where more than one person is responsible for repayment, will usually fall to the surviving borrower. For example, a joint mortgage, council tax bill, or utility bill.

However, if it's a loan in your name only, the lender will take the amount owed from your estate. If there's no money for them to claim, the debt may be written off.

Learn more about what happens to your debts when you die

Can life insurance cover debts?

Life insurance can be used to cover debts, but it could also help your family and/or loved ones with various expenses. From everyday living costs to a dream holiday.

As mentioned, lenders will take money owed from your estate, though this may not be enough to cover all outstanding debts. Joint debts, in particular, would become the responsibility of the co-signer, such as a partner or spouse. Therefore, they could be left with a significant financial burden, which is where people decide to take out some form of life cover.

Provided you have life insurance cover, your insurer will pay out a cash lump sum upon your death, which your family/loved ones may use as needed.

If you have a mortgage, for example, the money received could be used to pay off the remaining balance. Or, if it has been paid off, they could use it towards other debts such as credit card debt or loans. In either case, your family could have some much-needed support in a difficult time.

You could also choose to write your policy in trust, left to a chosen beneficiary. In this case, the money would fall directly to the beneficiary, and any creditors would be unable to claim funds from the policy.

What type of life insurance is best for covering debt?

The type of policy you need may reflect the debt you wish to cover; for most people, this could be a mortgage. There is no legal requirement for you to have life insurance for a mortgage; though some lenders may require it as a condition.

If you're looking to cover a mortgage, there are a number of options available.

Decreasing term life insurance (suitable for a repayment mortgage)

Decreasing term life insurance is often used to specifically cover a mortgage as it can be tailored to match its length and balance. Once active, the payout value will decrease in line with your mortgage balance as repayments are made.

Once your mortgage has been repaid, the policy will end as there will be no payout left to pay.

Level term life insurance

As a term-based policy, your cover will last for a set number of years as agreed with your insurer. The policy will then pay out, provided you pass away within the term. Because of this, term life policies tend to offer lower premiums.

Level term life insurance may be a good option if you have an interest-only mortgage or other debts that do not decrease over time.

This type of policy provides a fixed payout amount, which can help ensure that your family has enough funds to cover the full debt or support their financial needs. Your monthly premium rate also remains the same throughout the policy.

Whole life insurance

With whole-of-life cover, the clue is in the name. The policy will pay out a cash lump sum if you die at any given point, so long as you keep paying the premium.

Unlike decreasing term cover, it doesn't have to be used for a mortgage. Instead, it could be used to cover other costs like funeral expenses or to give your family/loved ones financial support after your passing. If you eventually pay off the mortgage, your family will still have financial protection from other debts or expenses they may face.

As it could potentially provide lifelong protection, premiums for whole life cover can be more expensive than for a term policy, and it is possible to pay in more than the policy is worth. 

We’d recommend talking to an insurance adviser to be sure that it’s the right policy for you. You can contact our team on

01392 436193 (Monday - Thursday 9am - 5.30pm, Friday 9am - 5pm)

Joint life insurance

As most couples tend to co-sign mortgages together, it could make sense to ensure that both partners are covered. Instead of taking out separate policies, joint life insurance can allow both partners to be covered under a single policy.

Typically, with this type of policy, a payout will be made upon the death of the first partner, which can help the surviving partner cover any debts left to them. The policy will end once a payout is made, so the surviving partner will need to take out another policy if they still wish to be covered.

Can I borrow money from my life insurance?

Some providers may allow you to borrow money from a whole life insurance policy, depending on the insurer and the terms of the policy. Whole life insurance builds cash value over time, unlike term policies which do not hold any cash value.

If you have a whole life policy with cash value, you may be able to take out a loan against that value. However, if you are able to borrow money from your policy, the amount borrowed will reduce the death benefit available if you pass away before repaying the loan.

Any interest on the borrowed amount will need to be paid back, or it could further reduce the final death benefit.

Please note: The insurance products offered by Cavendish Online have no cash-in value at any time. If you stop paying your premiums, your cover will stop, your policy will end, and you will receive no benefit. If you have not claimed before the end of your chosen policy term, the policy will end, and no benefit will be paid.