Can life insurance pay off debts?

Life insurance can be used to pay off some debts if your were to die while covered by the policy. The cash sum could be used to help pay off a mortgage, loans and credit card debts. As people want protection for different reasons, insurers offer a choice of polices. When it comes to the type of life insurance you choose, think about the debt you want to cover and how the policy works.

Remember, any life insurance claim on your policy will need to be valid. Also the payments you make to your insurer (known as premiums), will need to be paid and up to date. If not the legal owner (or legal representative) won’t receive a payout.

Yes. Life insurance can help pay off a mortgage if you pass away while covered by the policy, provided a valid claim is made. Below are the main types of life insurance that can help.

Decreasing Life Insurance (Mortgage Life Insurance)

• Designed for repayment mortgages.
• Your amount of cover reduces roughly in the same way your repayment mortgage reduces.
• Premiums stay the same throughout the policy.
• Helps ensure your family isn’t left with outstanding mortgage debt.

Life Insurance (Level Term)

• Pays a fixed lump sum if you die during the policy term.
• Premiums stay the same throughout the policy.
• Can help protect a mortgage and other costs such as:
  
  
  • Childcare
  • School fees
  • Household bills
  • Other financial commitments

Useful if your family relies on your income.

Life Insurance for Renters

You don’t need to own a home to benefit from life insurance.
If you were to pass away while covered by a policy, it could help your loved ones cover:

• Rent
• Household bills
• Any debts linked to the home.

If you pass away without a life insurance policy in place, your executors could choose to keep the property and take on the mortgage – subject to the lender’s approval. If they decide not to transfer ownership to themselves, they could sell the property through the ‘probate’ process and repay the lender with the proceeds.

If you only want to cover a repayment mortgage rather than household bills, you may wish to consider Decreasing Life Insurance. It’s usually a more affordable option because the amount of cover reduces roughly in line with the way a repayment mortgage decreases. For covering bills or providing a fixed lump sum, level term life insurance is typically more suitable. Life Insurance can also be used to protect a mortgage.

Yes, a life insurance payout could be used to pay off car loan debt. If the car loan is unsecured, your executors may choose to sell the vehicle in order to pay the outstanding debt. If the car loan is secured – such as HP (hire purchase) or PCP (personal contract purchase), the lender can repossess and sell the car to recover the debt. If the sale doesn’t cover the full amount, the remaining balance would be claimed from the estate. 

Any valid life insurance policy can provide a payout that your loved ones could use to cover unpaid bills such as water, gas, electricity, or other household expenses.

Once the utility providers have been notified and a final meter reading has been taken, any outstanding balance can be settled using money from the estate or from a life insurance payout.