It may not be the most pleasant topic to contemplate, but it’s crucial to have an idea of your finances in the event you suddenly die.
This can be especially true if you have outstanding debt, as your family members may be liable to repay the debt.
In this article, we’ll discuss some scenarios that may help you understand what can happen to your loans if you’re no longer living and who would be responsible for them.
A Cosigner Or Co-Borrower Pays The Loan If You Die
A cosigner agrees to take responsibility for repaying a loan if you cannot do so. Cosigners are commonly used for personal loans when the primary borrower doesn’t have a strong credit history or sufficient income to qualify for a loan.
A co-borrower is someone who applies for the loan jointly with the primary borrower. For example, two partners might apply for a personal loan together to fund a major home renovation.
The cosigner or the co-borrower becomes responsible for the outstanding loan balance in the event of your death. This means they will need to continue making payments on the loan until it is paid in full, in addition to any late fees and interest that may have accumulated.
If the cosigner or co-borrower is unable to pay off the debt, they can apply for a debt consolidation loan. Otherwise, the lender may take legal action against the co-signer.
Your Surviving Spouse May Have To Pay The Loan Off
Typically, a surviving spouse or family member is not responsible for any debt you leave behind unless it’s a shared debt or you live in a community property state.
Community property means that anything a couple owns or acquires, such as income earned, debts incurred, and property acquired during their marriage, is considered jointly owned.
Below is a list of the states that have community property laws:
Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
Your Life Insurance Policy Can Cover A Loan Debt
Your life insurance policy may be used to pay off the outstanding balance of your loan. This will depend on the specifics of your policy, but life insurance policies may have a death benefit that can be used to pay off debts and other expenses if you stayed on top of paying your monthly premiums.
If your life insurance policy lapsed due to nonpayment or the term ends before you die, your beneficiaries may not receive the death benefit and may be responsible for paying your debt.
Your Loan Balance Can Be Taken From Your Estate
An estate is essentially the total sum of your assets, which includes real estate property, bank accounts, investments, and personal belongings like jewelry or artwork. When you die, your estate is distributed according to your wishes if you had a will. If you die without a will (called intestacy), then state law will determine how your estate is distributed.
The outstanding balance of your loan can be taken out of your estate after you pass away, so your heirs and/or family may receive less from your estate than they expected.
The Bottom Line
Typically, no one is required to pay off another person’s debt unless they’re connected to it in some way. If you have a cosigner, share the loan with your spouse or other individual, or live in a community property state, they will be responsible for the remaining balance of your loan.
On the other hand, if you have a life insurance policy or the value of your remaining estate is sufficient, either may be used to pay off the outstanding balance you owe on your loan when you die.
In any case, it is important to communicate with your loved ones about your debts and to have a solid plan in place.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of reverbico.com or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
