As a life insurance company, we focus on helping you protect your loved ones' financial future. This means more than just covering day-to-day expenses; it also involves understanding what happens to your debts when you pass away. By knowing how different types of debt are managed after death, you can better determine the appropriate amount of life insurance coverage needed to protect your family.
This blog is intended to provide you with general information only and doesn’t take into account your personal situation or objectives. If you’d like advice about your personal situation, contact our customer service team at ask@pinnaclelife.co.nz or on 0800 22 22 23, or try our advice tool for a personal recommendation.
Mortgage: Yes, It Is Passed On
Mortgages are secured debts* tied to your home. When you pass away, your estate* is responsible for paying off the mortgage. If your estate doesn’t have enough funds, the house might need to be sold. Alternatively, if a family member inherits the house, they may also inherit the mortgage payments.
Credit Card Debt: Estate Responsibility
Credit card debt, being unsecured debt*, is paid from your estate. If your estate has enough assets*, these debts will be settled from these assets. However, if your estate doesn’t have enough funds to clear the credit card, then the credit card companies may not receive full payment. Your family members are only personally responsible for your credit card debt if they are joint account holders.
Student Loans: It Depends
In New Zealand, government student loans are written off* when you die. However, private student loans might not be, and they could become part of your estate's obligations. Always check the specific terms of your loan agreement.
Joint Debts and Co-signed Loans
The surviving borrower becomes responsible for the full debt for joint debts*, such as joint mortgages or co-signed loans*. This can be crucial when planning your financial future to ensure your loved ones are not unduly burdened.
Life Insurance
Life insurance proceeds are generally paid directly to named beneficiaries* and are not part of the estate. This means they are only used to settle estate debts if the estate itself is the beneficiary. Life insurance can provide a financial cushion to ensure your debts do not burden your loved ones.
Why Understanding Debt Matters for Life Insurance
Being over-insured means paying higher premiums, while being under-insured might leave your loved ones financially vulnerable. Some people prefer to cover every possible expense down to the cent, while others aim to protect 70-80% of their financial obligations. Understanding your debts and how they will be handled after your death is crucial in deciding the right amount of life insurance coverage. For instance, if you have a mortgage of $ 200,000 and credit card debt of $ 10,000, you might want to consider a life insurance policy that covers at least these amounts.
Plan Wisely to Protect Your Loved Ones
We care about protecting your loved ones and ensuring they are not affected by the loss of your income. Understanding what happens to your debts after you die is an essential part of this process. By being informed, you can make better decisions about the life insurance cover you need, ensuring your family's financial stability and peace of mind.
Remember, while this information provides a general overview, individual circumstances can vary. We understand that each person's financial situation is unique, and that’s why we always recommend consulting with a financial advisor or legal expert to get personalized advice tailored to your specific needs.
Glossary
Assets: All property and financial resources owned by an individual, including cash, investments, real estate, and personal belongings.
Secured Debt: Loans backed by collateral, such as a mortgage, where the lender can claim the collateral if the debt is not repaid.
Unsecured Debt: Loans not backed by collateral, such as credit card debt, where the lender cannot claim specific assets if the debt is not repaid.
Estate: All the money, property, and other assets owned by an individual at the time of their death.
Written Off: Debt that is forgiven and no longer needs to be repaid, such as government student loans in New Zealand upon death.
Joint Debts: Debts shared with another person. The surviving borrower becomes fully responsible for these debts.
Co-signed Loans: Loans where another individual has guaranteed repayment. If the primary borrower dies, the co-signer becomes responsible for the full debt.
Beneficiary: A person or entity designated to receive the proceeds from a life insurance policy or other financial assets.
