Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Aug 25, 2021

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The Brief

  • In most cases, a beneficiary does not directly incur debts left by the deceased
  • Outstanding debts can sometimes be deducted from an estate but usually not a death benefit
  • If you are the beneficiary of someone with a lot of debt, you might need to consult a lawyer to protect yourself

Life insurance is already an uncomfortable topic. Imagine a family member is buying term life insurance with many outstanding debts, and you’re the beneficiary. Are beneficiaries responsible for debts left by the deceased?

Life insurance underwriting and expectations can get a bit murky. We’ll guide you by simplifying the consequences of unpaid debt and what happens to unpaid debts when a person passes away.

Before learning more about if beneficiaries are responsible for debts left by the deceased, use our free quote tool to get instant rates from top life insurance companies.

Are beneficiaries responsible for debts left by the deceased?

Handling the death of a friend or relative is a challenge in itself. Being bombarded with calls from debt collectors is even more of a hassle. Who is responsible for a deceased person’s debt?

This depends on the type of debt and the relationship between the beneficiary and the deceased. There are different levels of beneficiaries, according to the Insurance Information Institute (III).

Debt comes in many forms and this is paramount when understanding your rights as a beneficiary.

Do beneficiaries inherit debt?

In most cases, beneficiaries will not be responsible for the debt of the deceased. This is only true if the beneficiary is not listed on the account or as a co-signer for specific debts.

For example, if your spouse recently died and you shared a mortgage, you would still be held accountable for that outstanding balance despite relying on one income. This is where a life insurance policy can protect you.

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On the other hand, if your older brother had nobody else to list as a beneficiary and you happened to be the recipient of his death benefit, you would most likely not be responsible for his outstanding mortgage.

Life insurance is designed to protect a beneficiary, more specifically a close family relative, from a major financial burden resulting from the passing of the deceased.

Can debt be collected from my inheritance?

In most cases, debt cannot be collected from your inheritance. Again, the rules above still apply. If your name wasn’t listed on any of the account documents, you’re most likely in the clear.

There are many unique situations relating to debt collection, beneficiaries, and life insurance. Again, some of these will depend on your relationship to the deceased and if you’re listed on any documents related to the debt.

Do I have to use insurance proceeds to pay my parent’s debt after death?

It’s uncommon for children to be responsible for a traditional outstanding debt left by a deceased parent. That said, there are some other situations to consider.

Although you may not be responsible for your parent’s credit card debt, mortgage, or student loan debts, there are situations in which you might lose value on your potential inheritance.

For example, your parents might leave you a home, real estate holding, or vehicle that is not completely paid for.

In short, if you plan on acquiring something like this and there is some outstanding debt, you’ll most likely be responsible for the remaining payments in some form. You would want to consult an attorney in this scenario.

Otherwise, you could experience some hassles when handling property and other debts that are tied to an equitable item. This usually doesn’t have any direct tie to the death benefit you receive, however.

If someone dies owing a debt, does the debt go away?

Some debts will seemingly disappear while others will go through a process to be repaid or reclaimed. Again, the type of debt is instrumental in how it will be treated.

The key here is understanding the difference between an estate and a death benefit. The estate is basically the savings that are available from bank accounts, retirement funds, and other resources from the deceased.

A death benefit is a payout given by a life insurance provider upon proof of death of the policyholder. In short, unpaid debt can often be deducted from an estate but not a death benefit.

Oftentimes, a company will seek to be reimbursed by an estate, or they may seek reparations in another way.

For example, companies might file claims against probate property, file liens against property, or repossess vehicles with outstanding debt.

As a whole, these debts aren’t directly incurred by the beneficiary, but they could create some problems. Estate planning life insurance could help diversify a portfolio to avoid some of these concerns.

The other top complaint amongst beneficiaries is handling debt collectors.

Debt collector harassment is common. These companies are paid to collect debt whether they’re using entirely ethical practices or not. Debt collectors aren’t obligated to be honest when attempting to collect a debt.

If you are a beneficiary and the deceased has any outstanding debts, it’s in your best interest to secure a lawyer that knows how to handle these situations.

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Debt Left by the Deceased: The Bottom Line

In most cases, a beneficiary won’t be directly responsible for outstanding debt left behind by the deceased. Many debts will be collected from an estate but won’t impact the life insurance death benefit.

We hope we’ve cleared up who’s responsible for debts left by the deceased. Before you go, use our free quote tool to get personalized rates from top life insurance providers today.