Many people purchase life insurance, prior to death, to leave loved ones with enough money to pay off debts, and to sometimes allow them to live comfortably. When a person dies, and there is a life insurance policy, the money must often be applied to the deceased’s debts, but not always. There are different rules that apply for different circumstances. The safest way to know for sure is to consult an attorney for advice. He will give you your legal requirements, but often times it is also a moral decision.
In most cases, a person names a beneficiary in his life insurance policy. A beneficiary is the person who will receive the payout from the life insurance. There might be one or more beneficiaries listed, or it might state that the proceeds become part of the deceased’s estate. Most of the time, in this case, the benefits received take place outside of probate court, and therefore, the beneficiary can avoid paying the deceased’s debts. A lot of times, a life insurance policy names the deceased’s estate as the beneficiary. In this case, an attorney handles the estate and the affairs of it. The attorney receives the insurance payout, and is responsible for clearing up all debts of the deceased. The attorney is also responsible, then, for distributing assets in the estate, according to the deceased’s will.
In any case, most debts do not disappear after the death of a person. The debts will linger and follow the loved ones of the deceased. Organizations do not typically forgive debts due to death. They will follow up with phone calls to the attorney handling the estate, or with the family members of the deceased. In some cases, a deceased person may have set up other insurance policies to cover debts in the event of death. This happens with secured and unsecured debts, such as mortgages, auto loans and credit card debts. A person, prior to death, can purchase insurance, such as mortgage insurance. If the person dies, the mortgage insurance should cover the remaining debts of the mortgage, leaving the balance at zero.
Many attorneys will recommend to beneficiaries, that they should pay the deceased’s debts, regardless of whether or not they are legally bound to or not. The debts generally will not be immediately forgiven. This can cause annoyances to beneficiaries when they continuously receive phone calls and letters demanding payment for debts. To completely stop the harassments, a beneficiary might pay the debts regardless of legal obligation.