Will my debt impact my life insurance payout?

Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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, updated on November 25th, 2021       

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Taking out a life insurance policy to protect your loved ones can be one of the best financial decisions you could ever make. But if you have been wondering how your credit card, mortgage, or personal debt will affect your life insurance payout or your beneficiaries planning process this guide is for you.

What happens to your policy when you pass on?

Passing on your debt to your loved ones is something anyone wants to avoid. According to reports, 1 in 3 Australian are unaware of what happens to their debt when they die.

Your life insurance may not be affected by the debt you leave behind, which means that the amount that you were insured for will be paid out to your beneficiaries as agreed.

If you have applied for life insurance through an insurer or broker, they will take you through the proper steps to ensure that you take out a policy that will adequately cover your loved ones and is protected from debt payments that are due.

When your policy won’t be paid out to your beneficiaries

During the application process to secure life insurance, your insurer will ask you to list beneficiaries whom you would like to benefit from your life insurance policy. However, if you have not listed anyone this can be used to pay your mortgage and other debts.

You could also choose to have the policy held in your own name which means that in the event of your death the proceeds of your policy will go to your estate which can then be used to pay off your mortgage and could potentially pay your debt.

Some people also choose to have their life insurance policy paid out in special structures such as a trust find. This is a complex process that needs to be done through professionals using expert advice when it comes to structuring it appropriately to suit your goals.

Beneficiaries obligation when it comes to life insurance

You may have taken out a policy to help your loved ones cover an array of expenses, which will then be paid out to them to use as they see fit. They will most likely have no obligation to pay off your debt, but they could use the policy to take care of your funeral arrangements. If they choose to cover your mortgage or debt they could do so, but they are within their rights not to if the policy is not processed through their estate. This is why it matters that you carefully consider the beneficiary of your policy.

When taking out a life insurance policy it is important that you think of what you would like to cover. If you know that you will have debt that needs to be taken care of, choosing someone who is responsible as one of your beneficiaries and telling them of this set up could possibly ensure that your debt is covered.