Is My Life Insurance Policy Applied to Debts First?
A lot of people think that when you die, your debts are instantly forgiven. Unfortunately, when it comes to secured debt like mortgages, auto loans and the like, this is not the case. The law on unsecured debt varies by state, but in most cases, your outstanding debts, as well as your assets, are considered part of your estate. Mortgages, auto loans and any other form of secured debt will be inherited by your surviving family along with your assets.
What Happens During Probate?
A part of your estate may be ordered to be paid to your creditors, as part of a process called probate. During probate, a judge will take a look at your will and determine whether the will is valid (this is usually a routine measure that simply verifies your will is legal). They will then determine the value of your estate. In the course of your estate valuation, the probate court may have your property appraised, and order your estate to pay any outstanding debts and taxes. Once the outstanding debt has been paid, any remaining property will be passed along to your heirs.
Life Insurance is Not Applied to Debts First
The good news is, your life insurance policy is not considered to be part of your estate. This money is passed on directly to your family, is not taxed, is not applied to debts, and is not counted as part of your estate in probate. One of the main advantages of having a life insurance policy is that proceeds from life insurance are treated separately from the probate process, which means that your heirs will be able to use it to pay off estate taxes, or any other outstanding costs. Your life insurance policy can be used to pay off debt, but it will not be applied to debts first by the probate court. Your life insurance benefits are there for your beneficiaries to use as they see fit.