What happens to your debts when you die?

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.

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.

What Happens to Secured Debts?

Mortgages

If you and a spouse or partner (for example) took out a joint 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.

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.

Decreasing term cover is often recommended for those with mortgages, as the payout decreases over time in line with the remaining balance on your mortgage. And as it's a term policy, the length of cover can be matched to the term of your 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.

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.

How can life insurance help with debts?

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.

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.

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.

How much does life insurance cost?

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.

Types of life insurance

The 2 main types of life insurance are 'term' life insurance and 'whole-of-life' insurance.

Term life insurance runs 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 if you survive the term, so, you may need to take out another policy if needed.

Whole life insurance pays out regardless of when you die, as long as you keep up with your premium payments. As it provides permanent cover, it's often more expensive than term cover, but you have the added comfort of knowing the policy will payout regardless of when you die.

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 benefits 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).