Do I have to use insurance proceeds to pay my parent's debt after death?

You're not responsible for the debts of your deceased relatives.

Question

My mother recently passed away. I'm 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?

Answer

No. If you receive life insurance proceeds that are payable directly to you, you don't have to use them to pay the debts of your parent or another relative.

If you're the named beneficiary on a life insurance policy, that money is yours to do with as you wish. You're not 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.

One exception to this general rule is in community property states. In those states, you're likely liable for your deceased spouse's debts if they were "community" debts.

Life Insurance Proceeds Belong To The Beneficiary

If you're the beneficiary on a life insurance policy, that money belongs to you. Your mother's creditors can't force you to use it to pay her debts.

Consequences of Unpaid Debt

You might, however, face consequences if the debts go unpaid. (These consequences are unrelated to your right to keep the life insurance money, though.) The consequences depend on whether your mother owned property that has to transfer through probate or whether the property had existing liens against it.

Claims Against Probate Property

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're 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.

Liens Against Property

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 kinds of assets or sell them yourself, it might make sense to work with these creditors.

Other Debts

If your mother didn't have assets that have to be transferred through probate, her other creditors, like credit card companies and medical providers, are out of luck. These creditors can't force you or other relatives to pay the debt and have no ability to collect through other means.

Stopping Debt Collector Harassment

Just because you're not responsible for paying the debt doesn't mean that creditors or debt collectors won't try to coerce you into doing so. If a creditor or collector is demanding payment from you for a debt owed by someone who's passed away, offer to provide the creditor or collector 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.

If you think a debt collector has violated the law when trying to collect a debt or if you need help dealing with an aggressive debt collector, or negotiating a settlement, consider consulting with a debt relief lawyer.

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