For the average American debt is an unavoidable consequence of life, and not necessarily a negative one. From student loans which can unlock higher incomes, to mortgages which can grant homeownership, to small businesses financing, there are thousands of wonderful, life-improving opportunities that borrowed money can make possible. However, all debt, whatever its source, can become a complex and painful problem for an individuals’ heirs and loved ones upon the occasion of their death.
The Process of Probate
When an individual dies their assets become their estate, regardless of the value of those assets. At the same time that these assets are defined, the process of probate begins to use those assets to pay off the estate’s debt (if any) before distributing the remainder to the estate’ heirs. Creditors, anyone to whom the deceased owed money, have the legal right to make claims against the estate and recover the money they are owed during this period.
As one might suspect, probate is a complex and often tedious or contentious process. But there is a bright side. The law draws a clear separation between the deceased and their friends, family, and other loved ones who may be named as heirs. If the deceased owed more than they owned, their assets will be exhausted during the probate process, and then any remaining debt is simply discharged—forgotten. The heirs or loved ones are NOT legally responsible for paying back any creditors.
There are a few exceptions. Certain states with community property laws require a surviving spouse to be responsible for any debt incurred during the marriage, whether the survivor incurred it personally or not. And, of course, if any survivors have co-signed on the debts owed by the estate they are also personally on the hook for paying back that debt. However, by and large when you die those whom you name as your heirs will never be legally required to pay back those to whom you are indebted.
Unfortunately, just because survivors are off the hook for paying back the deceased debt’s does not excuse an adult from planning ahead for their end. A huge number of other complications can and frequently do arise when individuals die in debt, complications which can be accounted for with planning and precaution.
For example, consider the story of a stay-at-home-mother with a small child, whose husband died unexpectedly. With the mortgage in the husband’s name only and no income to allow the wife to obtain her own financing, the house will be taken away from the survivors in order to address the debt carried by the husband’s estate.
And again, consider the case of an elderly grandfather who co-signs his college grandchild’s private student loans. Upon the grandfather’s death, the student loans immediately come due, exhausting the estate and putting the college student on the spot for tens if not hundreds of thousands of dollars.
Permanent Life Insurance as a Guaranteed Solution
In these situations, life insurance, particularly permanent life insurance such as Indexed Universal Life, stands as the single greatest benefit the deceased can provide their loved ones. This is because life insurance death benefits go directly to their beneficiaries upon the death of the policy holder and are NOT subject to probate. Creditors are generally unable to access these funds, meaning that the wife in the first example would be able to use the death benefit to pay off the mortgage or arrange for other housing while the student from the second example would be able to pay off their student loans and discharge that debt without dropping out of school or experiencing financial ruin.
For those who want to truly protect their loved ones and ensure the financial stability of their dependents up on their death, life insurance can make a crucial difference. For more information on making this different, contact Simplicity Life today! 800.921.3100