Life insurance to pay off debts vs. only final expense: pros and cons

When we sit down to talk about coverage, one question comes up again and again: "Do I only need enough for my funeral, or should the policy also pay off my house, my car and my credit cards?" There's no single right answer. A final expense plan and a larger life insurance policy solve different problems. Here I'll walk you through what actually happens to debts when someone passes away, the pros and cons of each option, and a simple way to figure out how much coverage you might need, step by step.

If you're still not sure how life insurance and final expense insurance differ in general, start with my other article, Life Insurance vs. Final Expense Insurance, at mariobarrera.us/en/blog/seguro-vida-vs-gastos-finales. This one goes one step further: it's about debts.

First: what happens to your debts when you die

Many families worry that their children will "inherit" their debts. The general rule is more reassuring than that. According to the Federal Trade Commission, family members usually don't have to pay a deceased relative's debts out of their own money. The debts are paid from the estate, meaning the money and property the person left behind. If the estate doesn't have enough, the debt usually goes unpaid. The Consumer Financial Protection Bureau explains it the same way.

But there are important exceptions. Both agencies say you could be responsible for a debt if:

• You cosigned the loan, for example a car loan.
• You are a joint account holder on a credit card (this is different from being only an authorized user).
• You are the surviving spouse in a community property state. The CFPB lists Texas, California and Arizona among them, along with Idaho, Louisiana, Nevada, New Mexico, Washington, Wisconsin, and Alaska if a special agreement was signed.
• You were responsible for the estate and didn't follow your state's probate rules.

There's another detail families often miss. Even when the children don't owe anything personally, the estate does. That means the house, the car or the savings you hoped to leave behind may have to go toward paying those debts first. And a home with a mortgage still has a loan attached to it: whoever keeps the house will generally have to keep making the payments or sell it.

Sources: Federal Trade Commission, "Debts and Deceased Relatives" (consumer.ftc.gov/articles/debts-and-deceased-relatives) and Consumer Financial Protection Bureau, "Does a person's debt go away when they die?" (consumerfinance.gov/ask-cfpb/does-a-persons-debt-go-away-when-they-die-en-1463/). Rules vary by state; for your specific case, talk to a lawyer.

Option 1: only final expense

A final expense plan is a smaller whole life policy designed to cover the funeral, burial or cremation, and the bills that come right after. It usually doesn't require a medical exam, only health questions, and the coverage is meant to last your whole life as long as you keep paying.

Pros:

• The monthly payment is usually easier to fit into a fixed income, because the amount of coverage is smaller.
• Approval is often simpler, even for people with some health conditions.
• It doesn't expire with age: it's there whenever it's needed.
• It makes sense when there's no mortgage left, no cosigned loans, and nobody who depends on your income.

Cons:

• It's usually not enough to pay off a mortgage or a large loan.
• If you share debts with someone (a cosigned car loan, a joint credit card, or a spouse in a community property state like Texas), that person could still be left with them.
• Your estate may have to sell the house or other property to pay what's owed.

Option 2: a larger life insurance policy that also covers debts

Here the idea is to choose an amount big enough to cover the funeral and also pay off the mortgage, the car or the cards, and in some cases replace income for a few years. There are two main types:

• Term life: covers you for a set number of years, for example while the mortgage lasts or while the kids are growing up. For the same amount of coverage, it's usually the lower-cost option, but if the term ends and you're still alive, the coverage ends too.
• Whole life: covers you for your whole life and builds cash value over time. For the same amount of coverage, it usually costs more each month than term.

Pros:

• Your spouse or family can keep the house without struggling with the payments.
• It protects whoever cosigned a loan with you, or shares a credit card account with you.
• If someone depends on your income, it can give them time to get back on their feet.
• The money goes to the beneficiary you name, and they decide how to use it: debts, funeral, or day-to-day expenses.

Cons:

• A higher amount means a higher monthly payment, and it can be harder to qualify the older you are or the more health conditions you have.
• Larger policies may ask for more health information, sometimes a medical exam.
• With term life, the coverage can run out at the age when you need it most for the funeral. That's why some people combine a term policy for the debts with a final expense plan for the funeral.

The real question isn't "Do I have debts?" It's "If I'm not here, who would be left holding them?"

When it makes more sense to cover your debts too

• You still owe on the house and your spouse or children live there.
• Someone cosigned a loan with you, or you share a credit card as joint account holders.
• You're married and live in a community property state, like Texas.
• Someone depends on your income to pay the bills.
• You want to leave the house or savings to your family, not use them to pay creditors.

When final expense alone may be enough

• The house is paid off, or there's no mortgage.
• Your debts are in your name only, with no cosigners or joint accounts.
• Nobody depends on your income.
• What you need most is a monthly payment you can keep for life on a fixed income.

How to calculate how much coverage you need

You don't need a calculator full of formulas. Grab a sheet of paper and write down these numbers, using your own statements and bills:

• 1. Final expenses: what a funeral, burial or cremation would cost where you live. Ask a local funeral home for its price list, which it has to give you.
• 2. Debts you want paid off: the current balance of the mortgage, the car loan and the credit cards. Use the payoff amount from your latest statement, not the original loan amount.
• 3. Income your family would need: if someone depends on you, how many years of support would you like to leave them.
• 4. Other goals: for example, help with a child's or grandchild's education.
• 5. Subtract what you already have: existing life insurance (including any through work), savings set aside for this purpose.

Add up 1 through 4, subtract 5, and that's a starting point. Then compare it with what you can comfortably pay each month. If the full amount doesn't fit your budget, it's better to cover the most important part (usually the funeral and the debts someone else would share) with a policy you can keep, than to buy a big policy and let it lapse in two years.

I can't give you a fair price in an article: it depends on your age, your health, whether you use tobacco, the amount and the company. What I can do is compare options with you so the numbers make sense for your family.

This article is general information, not legal or tax advice. Debt and estate rules vary by state. All coverage is subject to approval by the insurance company; price, plan type and waiting periods vary by company, age and health. Mario Barrera, licensed insurance agent. TX Lic. #3008095, NPN 17440153. Licensed in Texas, California, Florida, New York, Illinois, Arizona, Virginia, and Maryland.

← Back to blog