If I die, do my children have to pay my credit card debt? If all I leave them is life insurance money, can that be taken from them?
When a person passes away, the decedent's debts do not automatically pass to his spouse, children, or anyone else. Debts incurred by an individual are owed solely by that individual. If a person dies before his debt is paid off, then the creditor can attempt to collect the debt from the individualÂ’s estate, meaning that the debt would be paid before any money or other assets are passed to his heirs. However, if the person dies without sufficient assets to pay off the debt, then the debt is uncollectible and the creditor will likely write it off its books.
While a surviving relative is not liable to pay debts of the deceased out of his own assets, the probate court may require that any property belonging to the estate be paid to creditors before the heirs receive any inheritance.
Frequently, creditors will contact the surviving relatives of a recently deceased debtor to try to convince them to pay the debt owed by their late relative, despite the fact that the relatives are not liable. These collectors will often say things like, “Don’t you think your father/mother would want you to honor his memory by paying this debt” (I have actually heard that line before).
They often try to insinuate that a legal obligation to pay the debt exists, saying things like, “But you have been making the payments, so it looks like this is your debt.” Sometimes, they even state outright that a relative is legally obligated to pay the debt, which in most cases is absolutely untrue. Under federal law, making untrue or misleading statements in an attempt to collect a debt is illegal.
Life insurance is a contract between the insurance company and the person insured. A third-party beneficiary receives the benefit of this contract directly when the insured dies. A benefit is not probated. It is outside of the reach of the decedent's creditors.
As mentioned above, when an estate is probated, the decedent's assets are liquidated to pay off any creditors, and the remainder is distributed according the laws of the state (if the person dies without a will i.e., "intestate") or according to the decedent's will. Because the beneficiaries of a life insurance policy receive the benefits directly and not through the probate process, the benefits are not affected by debt owed by the decedent.
This is not a fact included in your message, but if you listed your beneficiary of your life insurance "my estate" then everything I wrote above about the benefit going directly to the beneficiary is incorrect. It is usually a good idea to list a person or persons as beneficiary to a life insurance policy, and conversely, it is a bad idea to list “my estate” as the beneficiary.
For additional general information, see the Federal Trade Commission documents Paying the Debts of a Deceased Relative: Who Is Responsible? and FTC Issues Final Policy Statement on Collecting Debts of the Deceased.
I hope this information helps you Find. Learn & Save.