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What you need to know about life cover and debt

A life insurance policy pay-out can be used to pay off your debts, making sure your loved ones aren’t burdened with extra expenses.

12 August 2019
6 minute read

Couple sitting in new house on laptop

You don’t want your family saddled with debts when you are no longer around. As well as making sure your family has an income, your life cover policy pay-out can be used to pay off the debt on assets such as your home.

We list the different kinds of debt you might need your life insurance policy to cover and give some tips on how to work out how much the cover should be. 

Home loan

Whether you are jointly paying a mortgage bond or carrying the costs yourself, it makes sense to pay this loan in full if a breadwinner passes on. This will free up cash for other expenses such as education. Your family may also want to move and having a fully owned home is a valuable asset they can sell to fund a new house.

How much do you need?
Your home loan statement will show the outstanding balance, but this may be different from the early settlement figure. Once a year, when you are reviewing your insurance policies, call your home loan office and ask for the settlement amount so you know how much life cover you need to cover this debt.

You won’t need to cover this with life insurance if:
You have mortgage insurance that covers the outstanding balance in the event of death. Mortgage insurance is life insurance so it will pay out in the event of death. It pays the balance on your account and ends when the loan is paid off. Check with your home loan company whether you have this insurance and if it will be enough to cover the outstanding amount.

Vehicle finance

Your family may no longer want to use your car if you pass, or they may want to trade it in for another vehicle. Car finance repayments can take a big chunk of monthly income, so paying it off means freeing up more income for other family expenses.

How much do you need?
Just like home loans, car finance loans have early settlement figures. Ask the company you have the loan with for the early settlement amount and make sure any balloon repayments are included. Car accidents are a common cause of accidental death, so it is a good idea to check with your short-term insurer how much they would cover if your car is written off in an accident in which you passed away. Compare this with the settlement figure to see if there is a shortfall you need to cover with life insurance. 

You won’t need to cover this with life insurance if:
You have insurance such as gap cover for your vehicle loan that will cover any shortfall in the event of death. Check with the company that finances your car if it is included in your contract.

Credit cards and store cards

If you have an amount owing on your personal credit card, this amount will need to be settled if you pass away.

Remember that if you have a joint credit card and the primary account holder passes on the account may be closed and your estate or the secondary account holder will be liable for the debt.

How much do you need?
The balance on your credit card statement will show how much the total debt is.

Check what credit protection and insurance you already have

You won’t need to cover this with life insurance if:
You have credit card protection or credit card insurance. Check with your credit card company to see if you have this and how much it will cover. You can also apply for this insurance on your credit card.

Bank overdraft

If your bank account is in the red, the outstanding amount needs to be settled or your heirs may become liable for the debt.

How much do you need?
The outstanding balance on your account is the amount you need cover for.

You won’t need to cover this with life insurance if:
You have overdraft insurance. Check with your bank, and if you don’t have cover find out how much it would cost.

Other loans such as from a family member or microlender

If you have any other loans that need to be paid in the event of your death, you need to make sure your family won’t be financially stressed if they have to pay these amounts. If you can, include cover for these in your sum assured.

How much do you need?
The outstanding loan amounts. Check with microlenders if they offer early settlement deals.

You won’t need to cover this with life insurance if:
There is other insurance on a loan, although this is unlikely.

Store or retail accounts

You may buy items on credit from a particular store such as appliances or furniture and be paying them off in monthly instalments. If the contract is in your name, the debt may become due on your passing.

How much do you need? The outstanding balance but check with the store if there are early settlement deals.

You won’t need to cover this with life insurance if:
You have credit life protection on your agreements.

Top tip: Always check the costs and terms and conditions of credit protection and credit insurance. Some credit protection is cheap, but some is expensive. Make sure you do your homework before accepting it.

Cell phone accounts, internet accounts and gym contracts

You’ll need to check with your provider what happens in the event of death. Some cell phone providers require the handset to be returned to them, others require the contract to be settled in full, others will cancel with no costs. Gym contracts can be cancelled on death.

These amounts may seem small individually, but they can add up to substantial amounts so find out what they are and decide if you need to include them in your calculations of how much cover you need.

How much do you need?
Check with your cell phone provider and other contract providers.

Maintenance support requirements

You may have children you are legally required to support until a certain age. You will need to provide for this in insurance or there could be a claim against your estate.

If you are supporting extended family members you may also want to provide for them in a life insurance policy, so they don’t suffer financial hardship.

How much cover do you need?
This will be specified in the divorce agreement, or you need to work out a monthly amount, multiply that by 12 for an annual expense and then multiply that by how long you need to provide for.

You won’t need this cover if:
You have a separate life policy for maintenance commitments.

Check your monthly payments for other debts

The list above is not exhaustive. You may have other debts, or you may have contributions and subscriptions you want to continue if you are no longer around, such as paying a premium on an investment policy for your spouse or partner.

You can identify these by going through your monthly payments and debit orders and seeing which ones would no longer apply, and which ones would benefit your family. You can then factor them into your calculation.

It’s a good idea to review this list once a year and see how the debts have changed so you can see if you have too much, enough or too little insurance. 

A final thought

If your debts aren’t covered by insurance your estate will become liable, and in the worst case your assets will be sold to pay your creditors. So, it is important to identify your debts and make sure they can be paid if you pass. When you are working out how much insurance you need, take all your outstanding debts into account.

Click here for a handy template to help you identify and calculate your debts. Fill in your debts and outstanding amounts, and review and update it every year.

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