When a person dies, all of his affairs must be settled through an orderly legal process. This includes paying off any debts that the person owed, and then distributing any remaining assets to the heirs of the estate. When the deceased person owed money on a car loan, the treatment of that loan will vary depending on the value of the estate, and other estate planning preparations that the owner made prior to his death.
Loan Life Insurance
If the owner of the car purchased a life insurance policy covering the unpaid balance of the car loan, this policy will pay the car off if the owner dies with an unpaid balance. These policies are commonly purchased at the dealership, but may also be purchased through banks and independent life insurance agents. You must provide the insurance company with a copy of the death certificate of the owner of the vehicle before they will pay the proceeds.
If the estate of the owner of the car has sufficient assets, the estate will be required to pay off the vehicle. This is done through the estate settlement, or probate process. The executor of the estate pays off the deceased person's debts with assets from the estate, selling them under court supervision if it is necessary to free up cash. After all of the debts of the estate are paid off, the executor distributes the remaining assets to the heirs.
Regular Life Insurance
If the owner of the vehicle had a life insurance policy that was not specifically intended to pay off the vehicle upon his death, the insurance company pays the proceeds of the policy to the beneficiary. This life insurance payout is not part of the estate of the car owner, and creditors have no claim against this money. The beneficiary may use it for any purpose, including paying off the vehicle, but he is not required to pay off debts. If the policy owner named no beneficiary, or named his estate as the beneficiary, the proceeds of the policy are available to the executor to pay off any debts of the estate.
If sufficient assets are not available to pay off the car loan, the bank can repossess the vehicle if someone else does not pay for it. One of the heirs can choose to pay off the vehicle and take possession of it, after paying the other heirs their portion of any equity in the vehicle. The bank may require payment in full at this time, or may be willing to allow the heir to assume the monthly payment obligation.