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Your debts don’t disappear when you pass. Before your loved one’s can inherit what you left for them, your debts have to be paid by your estate. This means they might not inherit as much as you intended for them. The answer is simple? Ensure that your life cover pay-out will pay off your debt so that your estate doesn’t have to.
What happens to your debt when you pass
Debts are not inherited, so your children won’t have to pay your home, vehicle or personal loan or credit card debt. * But your debts still need to be honoured, and outstanding balances paid on your passing.
This is because when your estate is being wound up all the debts have to be paid before any inheritance can be distributed to heirs. That could mean an asset such as a house needs to be sold to cover the bond or an investment account liquidated to pay credit card debt, for example. Only what is left can be paid out to the beneficiaries of the will, which could leave loved ones without the much-needed funds you intended them to have. And without the family home to live in!
Make a plan to pay off your debt with life cover
You can plan ahead so that your debts are paid in full when you pass away using your life insurance pay-out. Just make sure that your sum assured is enough to cover those debts. This will ensure that the legacy you want to leave your children remains intact!
Chat to your beneficiary/ies and ask them to work with the executor of the estate to use the payout for this purpose.
Your questions answered
Do I only need enough life cover to settle my debts?
It depends on your and your family’s circumstances. Using a life cover payout to pay off debts is just one use for life cover. Life insurance can also be used to give your family an income for life, pay for a good education for your children and theirs, give your loved ones extra funds for life’s surprises and more. A financial adviser is best placed to help you decide how much cover is enough for you and your family.
Doesn’t credit life insurance cover all my debts?
Sometimes but not always. Your home loan, vehicle finance, even a repayment agreement for a store card or personal loan may have credit life insurance that is designed to pay an outstanding balance on death. However, not all debts have this type, or a similar type, of insurance and the terms and conditions vary. Credit life can pay all of a debt, some of a debt, and in some circumstances none of a debt. Always check the contract closely so you know exactly what is covered and when.
Can I have both credit life insurance and life insurance?
Yes. Credit life insurance covers specific debts, while life insurance can provide broader protection for all your financial responsibilities and your family’s needs.
How do I calculate how much life cover I need to cover my debt?
Start by adding up all outstanding balances, including your home loan, car finance, credit cards and personal loans. Then add in a buffer for interest.
What happens if my life cover is less than my total debt?
Any shortfall will need to be settled from your estate. This could mean selling assets or reducing the inheritance your loved ones receive.
How quickly is a life insurance payout made after death?
It depends on the insurer and whether all documents are in order. Many insurers aim to pay valid claims within days, but delays can happen if paperwork is incomplete.
What happens to debt when a spouse passes away?
It depends on your marital regime and how the debt is structured.
- If you are married in community of property, both spouses are jointly and individually liable for all debts. This means the surviving spouse remains responsible for the full outstanding amount.
- If you are married out of community of property, each spouse is usually responsible for their own debts. However, if a debt is in both names (joint debt), the surviving partner may still be responsible for repaying it.
- If the debt is only in the deceased’s name, it will be settled from their estate before any inheritance is paid out.
Should I review my life cover as my debt changes?
Yes. As you pay off debt or take on new financial commitments, it’s important to update your cover so it still matches your needs.