Life insurance and debt

The question that sorts it

Did anyone else sign, and is the debt secured against something a survivor wants to keep?

Debts in your name alone are generally claims against your estate. If the estate can't pay, the creditor usually goes unpaid — which is unpleasant but not a burden that follows your family, in most cases.

Debt that lands on someone else

• Anything with a co-signer or joint borrower — a mortgage, a car loan, private student loans
• Debt secured against a home a survivor wants to keep
• Business debt you personally guaranteed
• Debt in a community property state, where treatment differs — take local advice
• An authorised user situation misread as joint liability, which is worth checking rather than assuming

Debt that generally doesn't

• Federal student loans, which are discharged on the borrower's death
• Credit cards in your name alone, which become estate claims
• Personal loans in your name alone
• Medical debt, subject to state rules and estate assets

Private student loans are the trap

Federal loans are discharged on death. Private loans follow their own contracts, and a co-signer — often a parent — may remain liable.

Check the promissory note rather than assuming. If a co-signer is on it, that balance belongs in your coverage calculation and almost never is.

How to size it

• List every debt with a co-signer or joint borrower, at current balance
• Add any personally guaranteed business obligation
• Add secured debt on property a survivor would keep
• Leave out sole-name unsecured debt unless you specifically want it cleared
• Add that total to your income replacement figure rather than treating it as the whole need

Be careful with credit life insurance

Coverage sold alongside a loan, paying the lender directly, is often expensive per dollar of benefit and pays your lender rather than your family.

A term policy you own, sized to include the debt, generally does the same job better and leaves your family in control of the money.