Will Debt Be Taken Out of Life Insurance When a Parent Dies?

Will Debt Be Taken Out of Life Insurance When a Parent Dies?
••• Hemera Technologies/AbleStock.com/Getty Images

Few events in life have the emotional and financial impact of a parent's death. An adult son or daughter may be called on to make funeral arrangements and settle their parent's financial affairs. The details of life insurance coverage determine whether a parent's creditors can make a claim against the proceeds from their life insurance policy.

Estate as Beneficiary

Generally speaking, when your father dies the debts he owed are paid off out of the assets of his estate. They may include cash on hand, bank accounts, real estate, vehicles and the like. If your father named his estate as the beneficiary of his life insurance, the proceeds from the policy are paid to the estate. After your father's debts are paid, the life insurance money, along with his other assets, are divided among his heirs. If there isn't enough money in the estate to pay all your father's bills, a court may order the sale of assets to generate enough cash.

Individual as Beneficiary

If your mother names you as the beneficiary of her life insurance, the proceeds from her policy go directly to you upon her death. Your mother's creditors must file claims for her outstanding debts with the probate court, which establishes whether her will is valid. The personal representative of her estate pays those debts with estate assets, even if it means selling them to generate cash. The estate can't require a beneficiary to pay life insurance money to the estate to cover debts, but it's got to come from somewhere.

Joint Debt

Some parents co-sign loans for their children. If money is owed on those debts when the parent dies and the child is named as a beneficiary, creditors can collect the remaining amount of the joint debt from the life insurance proceeds. In other words, if you're the beneficiary of your father's life insurance and he co-signs a loan with you, the lender can collect the balance from the insurance money if your father dies before the loan's repaid.

Judgment Creditors

Life insurance proceeds aren't protected against debt you roll up after you receive the insurance money. If you received benefits from your mother's life insurance policy and you owed credit card debt at the time of her death, your creditor can't make a claim against the proceeds. However, if you borrow money after you receive the policy money and default on that loan, the creditor can get a judgment against you and file a lien against the insurance money you received.