You are not responsible for the debts of your deceased relatives. This means that if you receive life insurance proceeds that are payable directly to you, you don't have to use it to pay the debts of your parent or other relative.
My mother recently passed away. I am an only child, and she named me as the beneficiary on her life insurance policy. The life insurance is $25,000. Unfortunately, she had credit card debt of about $7,000, a mortgage of $50,000, and medical bills of about $10,000. Do I have to use the life insurance proceeds to pay any of these debts?
No. If you are the named beneficiary on a life insurance policy, that money is yours to do with as you wish. You are never responsible for the debts of others, including your parents, spouse, or children, unless the debt is also in your name, or you cosigned for the debt.
There is an exception to this general rule for community property states, however. In those states, you are likely liable for your deceased spouse's debts if they were "community" debts. (Learn more about liability for marital debts in community property states.) (To learn about your liability for debts in common law states, see Debt and Marriage: When Do I Owe My Spouse's Debts.)
If you are the beneficiary on a life insurance policy, that money belongs to you. Your mother’s creditors cannot force you to use it to pay her debts.
There may, however, be consequences if the debts go unpaid. (These consequences are unrelated to your right to keep the life insurance money, however.) The consequences depend on whether your mother owned property that has to transfer through probate or whether the property had existing liens against it.
If your mother had assets that have to transfer through probate, her creditors will be able to file claims in the probate estate. Typically, property that has to transfer through probate is property where your mother held legal title in her name alone, such as real estate, bank accounts, or automobiles. The probate court will not transfer the property to the heirs until the administrator or executor pays all of the debts.
If you are expecting to file a probate estate, you should decide whether it will cost you less to settle with the creditors now or have the administrator or executor pay them through probate. An attorney can help you figure this out.
If the creditor had a lien against the property before your mother passed away, that lien will have to be paid before the property can be sold or transferred. For example, if your mother’s mortgage goes unpaid, the mortgage lender may foreclose on the house. Similarly, if your mother owned a car and was making payments on the car, the lender may repossess the car. If you want to keep these kind of assets or sell them yourself, it may make sense to work with these creditors.
If your mother did not have assets that have to be transferred through probate, her other creditors, such as credit card companies and medical providers, are out of luck. These creditors cannot force you or other relatives to pay the debt, and have no ability to collect through other means.
Just because you are not responsible for paying the debt does not mean that creditors will not try to coerce you into doing so. If a creditor is demanding payment from you for a debt owed by someone who has passed away, offer to provide the creditor with a copy of the death certificate. If the harassment continues, know that you can safely ignore it. You also have the right to report abusive debt collectors to the Federal Trade Commission, the Consumer Financial Protection Bureau, or your state’s consumer protection agency. (Learn more about your options if a debt collector violates the law.)