Why life insurance is a good idea when you are in debt

August 11, 2014

 Death comes for us all. Life insurance can ease the financial pain and pay the expenses of an unexpected demise, as well as provide for the welfare and support of loved ones. Everyone knows this. What many do not know is how death can affect a family’s debts. Many personal debts are not “carried to the grave” and can survive after death.

General Rule

The general rule is that a personal debt belongs to the individual. For example, a husband’s individual Visa card debt is not also the personal obligation of his spouse. However, the rules change in a community property state. Many debts that are incurred during a marriage by one spouse are the obligations of both husband and wife. That means the wife in our example may get stuck with the Visa bill in a community property state. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (plus Alaska, under certain circumstances).

Joint Debts

Unlike individual debts, many joint debts create multiple liabilities. When a husband and wife are joint account holders of a Visa card, they are both “jointly and severally liable” to pay 100% of the Visa debt. If the husband dies, the wife is stuck with 100% of the Visa bill, not 50% (unless the contract specifies).

These kinds of joint obligations are also found in co-signed or “guaranteed” debts. CNN Money recently ran a heartbreaking story about a young mother who died from liver failure. She left three children in the care of her parents. She also left them with a $200,000 student loan debt they had co-signed. The parents are now obligated to repay the daughter’s student loans, reportedly $2,000 per month.

Probate

When a person dies, whether personal debts are paid depends largely on if a probate estate is opened and the availability of probate assets for creditors. A decedent’s estate is responsible for paying off the individual’s creditors, such as medical bills and loans. If the estate goes through probate, an administrator or executor will account for assets and debts, and determine the order in which creditors and heirs will receive money.

Life Insurance

Many of these after-death debt problems can be solved by purchasing one or more life insurance policies. Life insurance is a “non-probate asset” which means that it passes to a beneficiary(ies) without first going through the probate process, as the name suggests. Life insurance is generally exempt from the taxes of the beneficiary (no inheritance tax). This money can be used to pay debts that may survive death and are passed on to co-debtors, joint debtors, and spouses.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

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