What happens to debt when you die?

How to avoid any financial burdens by staying organized

Getting final affairs in order is something many people prefer to avoid, but it’s an important step to take so that your family isn’t left wondering what to do. For example, do you know what happens to debt when you die? Or if beneficiaries are responsible for debts left by the deceased? It can be a little overwhelming—but the last thing you probably want is for your loved ones to be left guessing during such a difficult time.

Young or old, financially secure or not, it’s a good idea to have your personal matters organized at any stage of life. So, where do you start? How do you plan ahead? Well, you can’t prepare for everything, but you can use this guide for ideas about how to make it a little more manageable.

Striving for a safety net

Purchasing life insurance may not be top of mind for most people, but this could be one of the most important steps you can take to protect your family. Think of it as a backup financial plan for your loved ones, so you don’t have to worry about what happens if you die with debt.

If you’re married with kids, have debt or have high estate taxes, life insurance could be a financial lifesaver for those left behind. Unexpected accidents and illnesses do happen, and life insurance money could help your family pay for expenses they may be left to handle.

When choosing a life insurance policy, there are two major options: term life insurance and whole life insurance.1 Deciding between the two is a personal choice. It all comes down to what’s right for you and your family, but here’s a breakdown of what you might expect with each option:

Term life insurance

  • Usually the most affordable type of life insurance
  • Provides benefits only in the event of your death
  • Purchased for a specific period, such as 15 or 20 years
  • Pays benefits to your loved ones only if you die while the policy is in effect
  • Must be renewed if you want your coverage to be extended past your term length
  • Typically, you can change term life insurance into whole life insurance

Whole life insurance

  • Covers you for life
  • More expensive than term life insurance
  • Cash value grows during the life of the policy and also provides death benefits
  • An investment that could factor into your estate planning
  • If needed, you can borrow or withdraw cash during the life of the policy

Costs for life insurance will vary depending on the type of policy you get. Things like your age, health and what you want out of the policy will be factors when making a decision. Term life insurance may be enough for some families, but you’ll still want to research life insurance to figure out which is right for you.

Writing a living will and a last will

These wills may sound similar, but they’re actually very different. A living will is a legal document that details your medical wishes. If you get sick and aren’t able to make decisions, this document explains how to handle your care. With a living will, you’ll decide things like whether or not you want to be kept on life support and if you want your organs donated. When writing your living will, assign someone you trust to make sure your medical wishes will be followed. And if you get better, you can return to making your own choices from that point on.2

When you make a living will, you’ll need to sign and notarize the document. How this paperwork is processed varies by state, so consider talking to a lawyer to see what’s required where you live.2

A last will is a legal document that determines how your property and assets will be divided up after your death. In the will, you’ll typically name an executor of the estate. This is just a fancy title for someone who will carry out the details of your will.

A last will is probably one of the most important documents to have. Without one, state law will decide who will inherit your assets instead of you. In most states, you won’t need to have your will notarized, but you may need to have two witnesses present. Every state is different, so be sure to find out if you have to follow a certain process in order to write your will.3

Setting up a trust fund

A trust fund isn’t just for the very wealthy. They could be a great option, depending on your needs. Generally, different types of trust funds are used to hold assets—like real estate, cash stocks and other valuable possessions—for the benefit of other people, groups or organizations. Trusts typically involve three key groups:4

  1. The grantor, the person setting up the trust to pass on their assets.
  2. The beneficiaries, the person, group of people or organization that will receive the assets.
  3. The trustee, who is in charge of managing the trust.

Because there are so many types of trust funds, it’s a good idea to do your own research. Talking to an expert, if possible, could also be helpful.

Saving for a funeral

The average cost of a traditional funeral can be around $8,000 to $10,000—or more.5 That may seem like a substantial sum, but here’s how different aspects of those services may add up:

  • Casket: $2,300 or more
  • Funeral director’s basic service fee: $1,500
  • Embalming and body preparation: $600
  • Funeral ceremony and viewing: $1,000
  • Misc. items, such as hearse, death certificate, obituary, etc.: $600
  • Grave: $1,000
  • Cost to dig grave: $1,000
  • Headstone: $2,000
  • Grave marker: $1,000

Prices will vary depending on where you live and what will be included. Some families opt for cremation, which may cost anywhere from $1,000 to $5,500.6

After seeing the average cost breakdown, it’s easy to see why saving for a funeral is a priority for many people. But it’s OK to take time to think about what kind of services you want. You may want to draft a letter that details the kind of funeral you prefer.7 Of course, you’ll need to make it accessible to let your loved ones know about it. In a stressful time, this can help your family through some difficult decisions.

Organizing your important papers

Some people keep important papers in a variety of places—drawers, file folders, computers. That can be challenging for family members who need to find them. Think about putting copies of everything they’ll need in one place, making sure loved ones know where that place is. It can be a file in a desk or dresser, or you can keep everything in a bank safe deposit box. As for what to have on file, it’s up to you, but here are some details to consider including:8

  • Full legal name
  • Social Security number
  • Place and date of birth
  • Birth certificate and marriage license
  • Your living will, last will and any other legal documents
  • Insurance information
  • 401(k) documents
  • Bank, stock, bonds and property account information
  • Updated list of mortgages and debts

As you start thinking about this, you may have other items you would want to include. Once you have everything organized, be sure to let someone you trust know where it is. And it’s always good to check your paperwork every few months to make sure your information is up to date.

Asking for help

Making final arrangements isn’t easy for anyone. And talking to your family about this topic can be difficult. But instead of worrying about what happens if you die with debt, you can take a few steps now that may alleviate some worry. If these topics are still a bit confusing, you can always reach out to a lawyer who’s well-versed in these issues. They’ll understand what’s required in your state, and be able to guide you through the process.

While your initial reaction may be to put off planning for your final affairs, getting organized now can be helpful down the line. Whether you're investing in life insurance or setting up a trust fund, be sure to explore your options and find the best fit for you.

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