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How does debt impact life insurance?

Mar 3, 2021 4 Minute Read

Debt is a huge issue in the U.S., especially during the COVID-19 crisis. The total consumer debt in the U.S. is now at $14.1 trillion, and the average American carries a personal debt of about $90,000, whether it’s credit card debt or student loan debt.

One of the main reasons that people buy life insurance is to cover their debts when they pass away. The payout from a policy can help loved ones pay off credit cards, medical bills, car loans, and more. But do you have to use the money to pay debts? Here’s what you should know.

Can I buy life insurance if I have debt?

Not only can you buy life insurance if you’re dealing with debt, it’s often a good reason to get covered. If you’re trying to put aside every penny to pay off debt and are concerned about adding another expense, keep in mind that life insurance premiums are relatively small compared with the potential payoff.

For the cost of a takeout dinner for two each month, a healthy 30-something can buy a term life insurance policy that will provide their loved ones with hundreds of thousands of dollars if they die – most likely more than enough to cover student loans, mortgage, or other debts. Plus, waiting until after you pay off your debt may mean more expensive rates, since they go up as you get older.

Can debtors take life insurance money?

Can debtors collect life insurance as payment? Life insurance works a little differently than other assets when you die. Any personal holdings, like bank accounts and investments, go to your estate. Your estate is required to pay off any debts before distributing the rest of your money to your loved ones. If you die with a lot of debt and not much money, this could mean that your family doesn’t get any inheritance.

With life insurance, though, your beneficiary or beneficiaries receive the payout directly. Since your debts are in your name, not theirs, they generally aren’t required to use the funds to pay your debts. Life insurance can be a way to provide your family with a guaranteed source of cash when you die.

Keep in mind that some debts may still fall to your family, including your mortgage if you bought a home with your spouse or any co-signed debt like student loans and cars. Life insurance can help loved ones pay those costs.

Another expense to keep in mind? Your funeral. Funeral costs generally fall to your next of kin. Life insurance can help make sure that your family is able to cover your funeral, your burial, your casket, and more.

Can life insurance be used to pay off debt?

If you know you’ll have debts like a mortgage, it’s possible to use life insurance to pay them off directly when you pass away. One potential way may be to name your estate as your beneficiary. When you die, the payout will go to your estate to cover these costs. If you’re planning to do this, let your will executor know to use life insurance to cover these debts.  Talk to a financial or legal advisor about these options.   

Still have questions?

eFinancial is here to help you find the right coverage for you and your family. Call us or start your quote online today.


At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.