017 – Will my life insurance be used to pay my debts?
This week we discuss the question of whether your life insurance policy will be use to pay your debts at the time of your death. Listen in to find out if your family will be responsible for the debts you leave or if they will have to sacrifice any of the life insurance proceeds you have to pay those debts.
Another form of this question is, “will my loved ones be responsible for my debts at the time of my death?“
The answer is a unique combination of estate planning, probate, and contract law. As a general rule, no one else is responsible for your personal debts. So, if you die with a lot of credit card debt, your wife and children will not be responsible for the debt. However, your estate is responsible for those debts. So, if your probate estate holds property, that property can be used to satisfy your debts. For example: you die with a bank accounts solely in your name with a $20,000 balance. You also die with a credit card debt of $15,000. Even if you leave a will devising your entire bank account to your wife, the credit card company will be able to see to have their debt satisfied from the bank account balance leaving $5,000 for your wife to inherit.
Let’s take this example back to the life insurance question originally posed. Now, instead of having a bank account, let’s assume you have a $200,000 life insurance policy and $15,000 in credit card debt. A life insurance policy is a contract and as a matter of contract you can delegate your insurance proceeds to your chosen beneficiary. Upon your death, the life insurance proceeds will be paid to your beneficiary, the funds will skip right over probate and none of the insurance proceeds will be required to be paid towards the credit card debt. If you fail to name a beneficiary or your primary beneficiary predeceases you and you fail to name a replacement or have a contingent beneficiary, then your life insurance proceeds will be paid into your estate. At that time those proceeds would be used to pay the debts of your estate, and then the remainder would be distributed to the heirs and devisees of your estate.
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