It’s not something anyone necessarily wants to think about, but when the time comes, it’s certainly worth understanding what will happen to your debts when you die, and how it will affect what you intend to leave to your loved ones. After all, nobody wants to burden their family with costs they may not be able to cover without your financial support.
One of the main reasons to have a life insurance policy is to help pay off your debts when you die.
It’s helpful to know how various types of debt are handled after death, as this will help you determine how much life insurance you may need. Bear in mind, that any assets that need to be taken from your estate to cover debts would leave your beneficiaries with less. However, a payout from a life insurance policy could be used instead to cover your debts. As an example, a property that may otherwise have to be sold off, could be retained by your loved ones.
Contrary to popular belief, most debts don’t simply disappear when you die, as creditors can still look to collect what is owed from your estate. Probate is the legal process where assets from your estate are distributed and debts are paid, and there’s a different way of dealing with (and paying off) different kinds of debt.
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Debt Priority
If there is enough money in your estate to pay off debts, they have to be paid in priority order.
1. Firstly ‘secured’ debts such as mortgage repayments and car finance.
2. Secondly, 'priority' debts eg. income tax and council tax.
3. Thirdly, ‘unsecured’ debts including utility bills and credit cards.
Here’s how these common types of debt typically are handled:
What Happens to Secured Debts?
Mortgages
If you and a spouse or partner (for example) took out a mortgage together, the surviving borrower would then be responsible for the loan. This is where the benefit of having a life insurance policy comes in, as the joint-signatory wouldn’t then be saddled with the responsibility for paying off the remaining balance. So, factor in how much is owed on your mortgage when calculating how much life insurance you need.
If there is no joint-signatory on the mortgage, no one is obliged to take on the mortgage. However, that doesn’t mean your family can inherit or expect to continue living in the property. If they wish to keep the home, they would have to then take on responsibility for the loan. If they decide to sell instead, they will need to continue making mortgage payments until it’s sold, where the remaining mortgage debt would then have to be paid off.
If no one takes over the mortgage after you die, the mortgage provider can then foreclose on the property and sell it to recover the amount owed on the mortgage.
Car Finance
Your family will have a few options to handle any debt owed on a vehicle:
They could let the lender repossess the car if they don’t want it.
Contact the lender to negotiate a settlement value
Or they could keep the car by continuing to pay what is owed on the loan, subject to eligibility.
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What Happens to Priority Debts?
These need to be paid before any unsecured debts are paid.
Council Tax
A partner of the person who dies would be liable for any council tax arrears if they were living in the house, even if their name is not on the bill. If the person was not named on the bill, the council would have to send a new bill in their name before they could recover any outstanding council tax.
They would also be responsible for the ongoing bill, but could claim a 25% discount if they are the only adult in the house.
Utility Bills
Similarly to Council Tax, a joint occupier would automatically be liable for any arrears, even if their name is not on the bill. They would also be responsible for any ongoing bills.
What Happens to Unsecured Debts?
Credit Cards
If you have any joint credit card accounts, the co-owner would have to pay any balance on the account. If your credit card accounts are in your name only, the credit card companies could make a claim to get paid through your estate.
If there is no estate to satisfy these debts after death, then the debt would most likely be cancelled.
Student Loans
In the UK, if someone with an outstanding student loan dies their student loan (from the Student Loans Company) would usually be cancelled.
Collating All Your Debts
Sorting out your debt after you die can be a stressful and time-consuming experience for your family, as well as coping with the loss emotionally. With this in mind, it’s a good idea to attempt to make things as easy as possible for your family in the event of your death by keeping things organised.
If you're concerned about debt then it's important to know that charities such as Step Change may be able to help and support you in getting your finances back on track. Their website also contains a wealth of articles and information on common debt related questions.
The Importance of Life Insurance
Consider all of the types of debt listed above when determining how much life insurance you’ll need. As everyone’s situation is different, so is the type of protection you need and depends on your personal situation and what stage you are in life.
Your age, health in general (including if you smoke) and your marital status are just a few factors that are considered when applying for cover and how much your monthly premium (payment amount) will be.The Importance of Life Insurance
Consider all of the types of debt listed above when determining how much life insurance you’ll need. As everyone’s situation is different, so is the type of protection you need and depends on your personal situation and what stage you are in life.
Your age, health in general (including if you smoke) and your marital status are just a few factors that are considered when applying for cover and how much your monthly premium (payment amount) will be.
A life insurance policy will pay your dependents a lump sum or regular payments if you were to die unexpectedly. If you have a partner or children, life insurance provides you with the peace of mind that they will be able to manage financially if you were no longer around.
The amount of money paid out depends on what level of cover you purchase. You decide how it would be paid out and whether it would cover specific payments, such as rent or a mortgage.
The 2 main types of life insurance are 'term' life insurance and 'whole-of-life' insurance.
‘Term’ life insurance policies run for a fixed period of time (known as the ‘term’ of your policy) eg. 10, 15 or 25 years - and will pay out if you were to die during the term of the policy. There’s no lump sum payable at the end of the term.
‘Whole-of-life’ insurance policies pay out regardless of when you die, as long as you keep up with your premium payments.
Bear in mind, life insurance usually only covers death; if you can’t provide for your family because of illness or disability, you typically won’t be covered; however most life insurance policies provide terminal illness benefit that will pay out on diagnosis of an illness with a short life expectancy (this is different for each insurer, so check your policy documents for more information). You may also wish to consider critical illness cover which is designed to cover you in case you get a specific type of life-changing condition (as long as it meets the provider's specific definition).
Speak to us at Cavendish Online today for more information and to get a quote for life cover.
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