What Happens if You Die Without Life Insurance?

Life insurance is a crucial financial tool that many Americans overlook. In fact, about 50% of Americans don’t have life insurance. If you die without life insurance, your assets will be distributed to your heirs, but your loved ones won’t receive an insurance payout. This can leave them to cover your funeral costs and unpaid debts on their own.

When you die, your estate, which includes everything you own—investments, savings accounts, home, car, and more—will be distributed among your surviving family. If you have a will, it will specify who gets what. Without a will, your estate goes through probate, where a judge determines how your assets are handed out.

Why Life Insurance is Essential

Life insurance can help your family cover various expenses after your death, including:

• Funeral Costs: The average funeral and burial cost is $7,848, according to the National Association of Funeral Directors. Without life insurance, your family will have to pay for these costs out of their own pockets.
• Lost Income: Without your income, your spouse might struggle to pay the mortgage or put food on the table. Your stay-at-home spouse may have to re-enter the workforce, or your child might be forced to drop out of college to help support the family.
• Lost Services: Stay-at-home spouses contribute unpaid labor that can be costly to replace, such as housekeeping, cooking, and child care. In 2022, the average cost of child care nationwide was $10,853 per year, according to Child Care Aware of America.
• Lost Benefits: If your family received health insurance through your job or you were contributing to an employer-sponsored 401(k), losing these benefits can put a strain on your household finances.
• Future Expenses: Your death may make it harder for your spouse to save money for major life expenses, such as your children’s college tuition or weddings.

What Happens to Your Debts When You Die?

Many people die with unpaid debt, whether that’s a mortgage, a car loan, credit card debt, or something else. If your estate has enough money to pay all your debts, your creditors will be repaid first, then your heirs receive the remainder of the estate. If there isn’t enough money to pay all your debts, the court prioritizes which are repaid first.

Secured debt, such as a mortgage or car loan, takes priority. The lender might repossess the loan collateral (such as your car) unless secured debt is repaid. Paying back secured debt may require the executor of your estate to sell or refinance assets.

Unsecured debt, such as credit card debt or unsecured personal loans, is typically discharged if your estate can’t repay it. However, this isn’t always the case. For example:

• Federal student loans will be discharged, but private student loans may not be; it depends on the loan terms.
• Medical debt is generally discharged. In some states, though, your spouse or children are responsible for it.
• Credit card debt is typically discharged unless it’s on a joint credit card (meaning both spouses are considered co-borrowers) or you live in a community property state.

Should You Get Life Insurance?

On average, life insurance costs about $360 a year, which could feel excessive for something you may never use. When does life insurance make sense, and when can you skip it?

Single With No Dependents

If you are single with no dependents relying on you for financial support and no plans to have children in the future, you probably don’t need life insurance. However, if you’re young, plan to marry or have children eventually, and the cost is within your budget, getting life insurance now—before you really need it—could be a good idea.

Term life insurance lasts for a certain period, generally up to 30 years. During that term, your premiums stay the same. Since term life insurance premiums are generally lowest when you’re young and healthy, purchasing term life insurance in your 20s or 30s could lock in a low rate until your 50s or 60s, when you may not need life insurance anymore.

If you don’t need life insurance but want to prevent your parents from having to pay for your funeral, you can purchase burial insurance. This covers only the cost of your funeral and burial or cremation; it usually pays out between $5,000 and $25,000.

Married and/or With Dependents

If you are married or have dependents such as children or elderly parents relying on your income, purchasing life insurance is usually a smart move. That’s because life insurance payouts are protected from creditors. No matter how much unpaid debt you leave behind, you can rest assured the insurance money will go to your beneficiaries, not to your credit card company.

Even if you’re married with children, you may not need life insurance if your investments, savings, and other assets will provide enough for your heirs to live comfortably without your income. Like life insurance payments, retirement accounts and brokerage accounts are protected from creditors, as are assets in certain types of living trusts. Having significant amounts of money in these investments can balance out any loss your heirs may experience from your death without life insurance.

The Bottom Line

Life insurance can provide peace of mind by helping provide for your loved ones after you’re gone. Not everyone needs it, but if you decide buying life insurance makes sense for you, a term life policy is usually the most affordable option. To save on life insurance, choose the right amount and type of coverage and shop around to compare prices.

Many states allow insurers to check your credit-based insurance score when determining your premiums. In those states, having good credit could save you some money. Before you start shopping for life insurance, check your credit report and credit score. If your score is less than stellar, taking steps to improve your credit could pay off in lower premiums.

Contact O1ne Mortgage for Your Mortgage Service Needs

At O1ne Mortgage, we understand the importance of financial security and planning for the future. Whether you’re looking to purchase a new home, refinance your existing mortgage, or need advice on life insurance, our team of experts is here to help. Call us today at 213-732-3074 for personalized mortgage services that cater to your unique needs. Let us help you secure a brighter future for you and your loved ones.