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Using life insurance to protect your heirs from your debt

On Behalf of | Jan 22, 2022 | Wills & Estates

It is natural to worry about making sure your family inherits from you. Unfortunately, many people struggle with debt. Whether you have medical debt, student debt or an outstanding mortgage, you do not want your family to lose out on an inheritance because of money you owe to creditors. In this situation, life insurance may assist your loved ones.

In general, taking out a life insurance policy is a wise move. In the event you die suddenly and unexpectedly, your life insurance may provide a payout for your family after they lose your income. In addition, life insurance may provide for your family even if you still have outstanding debts after your death.

Life insurance and your creditors

If you die while owing creditors money, your estate executor will become responsible for paying off your debts with your remaining assets. This could deprive your family of an inheritance if the debt consumes the money in your estate. However, U.S. News and World Report explains that creditors generally cannot touch retirement accounts and insurance policies.

As a result, if you name your family as beneficiaries on your life insurance, they will receive a payout after your death. It will be up to them to determine how to spend the money. They may decide to pay off a debt you owe if it benefits them, like an outstanding mortgage on a home they live in, or they may spend it on food, medicine, or anything else they need.

Keep track of policy beneficiaries

Consider naming backup or alternate beneficiaries on your life insurance. Problems may arise if your beneficiaries die before you do. If this happens, the death benefit on your policy may go to your estate. This could expose your insurance benefits to creditor claims. If you have anyone else you want to benefit from your policy, be sure to name that person as a beneficiary.

Also check to see if any of your family members have cosigned your debts or jointly own debt with you. If so, they may become responsible for those debts after you die. Fortunately, your life insurance policy may help your loved ones by providing money to pay off those debts.