What happens to our debts when we pass away?

Family generations sitting on a wall

May 14, 2021

In 2019, the average UK household debt was just over £15,000.

But what happens to our outstanding debt, such as unpaid loans, when we pass away? Are our loved ones responsible for paying it off? Will our family members have to take on the financial burden or does our debt die when we do?

The answers to these questions are not straightforward, as the likelihood of your family having to take on your debut depends first of all on the type of debt that is outstanding.

Below, we take a look at all the potential issues that could arise regarding outstanding debts when you pass away, and what measures you can take to protect your loved ones.

Your estate could be used to cover your outstanding debt

It is the responsibility of the executor (the person in charge of probate and administering the estate) to make sure that the deceased person's outstanding debts and bills are settled and taken care of before their family and other beneficiaries receive their share of their assets when they pass away.

Certain outstanding debts could take priority before your estate is distributed among your family, meaning that the inheritance you leave your loved ones could be affected if your estate is used to pay off your remaining debt.

Can a life insurance policy be used to pay off my debts?

When you take out a life insurance policy, you are usually asked to name a beneficiary of your policy, i.e. the person who will receive the payout when you pass away.

If a beneficiary has not been named then the life insurance payout could be considered as a part of your estate that is to be distributed along with your other assets – so it could be used to pay off your outstanding debts.

As a life insurance policy could be considered when calculating the sum of your estate and be subject to Inheritance Tax (IHT), you could consider having your policy written into a Trust.

How could a family member be held responsible for my unpaid debt?

Debt isn’t just written off when we die, and there are certain circumstances where your family and loved ones could be forced to inherit your debt when you pass away.

As well as potentially decreasing the amount of inheritance received from your estate, your family could be affected if you have any joint debts – as these could become the sole responsibility of the remaining party when you die.

To better understand this, we need to understand the differences between individual and joint debt:

Individual debt

This is when you take out a loan or credit agreement in your name only. Typically, outstanding credit card debt would fall under this category. Sometimes, the estate of a deceased individual can be used to pay this type of debt and, as it was taken out by an individual independent of anyone else, there is no reason why anyone else would be held responsible for paying it off.

Joint debt

Joint debt, on the other hand, occurs when two or more people take out something together such as an overdraft on a joint bank account or a joint mortgage, for example. This means that if you pass away unexpectedly then the other party may be held responsible for the outstanding payments. This could be your spouse, a partner or even a friend who could be liable to pay off the remaining debt.

If you pass away before paying off a sizable debt then your family could find it difficult to keep up with the payments, which could result in the potential loss of the family home or other assets.

If this is a concern then you should consider taking out a life insurance policy to help protect your loved ones financially should the worst happen.

How can life insurance help with outstanding debt?

If you have a life insurance policy in place then your loved ones could use the payout they receive to help manage any outstanding debts such as mortgage repayments and avoid losing the asset-in-question. This also applies to any joint loans you may have outstanding with a family member or friend.

As your other assets (such as any money you have in a savings account, for example) could be used to pay off certain debts as part of your estate before it reaches your beneficiaries, it can be a good idea to have a life insurance policy in place that will be paid directly to your named beneficiaries.

For more information and advice on life insurance, take a look at our related guides below. Or get a quote and/or expert advice from our life insurance advisors by tapping the button:

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