Debt: The Inheritance No One Wants

Originally posted on CUInsight.

Guest post written by Kristi Nelson, Second VP and Actuary, Securian Financial Group

Second VP and Actuary
Second VP and ActuarSecurian Financial Group

Have you thought about what would happen to your debt when you die?

When Securian Financial Group posed that question to 1,004 Americans of all ages in an online survey last September, nearly one third (31 percent) said they had not thought about it.

Lopsided personal finances

Among the respondents in Securian’s recent survey who hold debt as primary borrowers or cosigners, significant percentages could leave behind large financial obligations if they died. Twenty percent owe $100,000 or more. Forty-four percent owe $25,000 or more.

The current state of personal finances is worrisome. More than half (56 percent) say their debts exceed their assets and 41 percent say their debt is “much higher” than their assets.

If no arrangements are made to address the handling of the debts after a death, survivors may be responsible for payment of the debt.

Debt doesn’t always die with the borrower

The survey also asked respondents what they think would happen to their debt if they died.

Across the various types of debt mentioned, approximately 10 percent believe that if they died the lender would forgive the loan or it would simply go away. That number doubles for student loan borrowers.

If there is no cosigner, the lender will seek to collect the debt from the estate, which could result in the sale of assets including homes, cars and other property. If a spouse, child, parent or anyone else cosigned a loan with the deceased, the cosigners are liable for the debt. A spouse is responsible in a community property state even if he or she did not cosign the loan. That’s a lot of “ifs,” considering that

57 percent of the respondents are married and another 11 percent are divorced or separated.

When asked how they’d feel about saddling their survivors with debt, their responses fell into three categories – regretful, prepared or unconcerned.

“I would feel terrible. I do not like the idea of leaving my mistakes to other people.”

“I would feel awful. But I have insurance as a part of my payment plan to prevent that.”

“My ex can totally afford it.”

“I’m sorry but I will be dead and they can figure it out.”

Huge majority of borrowers financially unprepared for sudden death

When asked to select all the steps they would take to provide financial protection as borrowers or cosigners, only 127 respondents (18 percent) indicated they had no need or already have financial protections in place.

Perhaps taking the survey will prompt the 698 others to take action. More than half (55 percent) said they are most likely to draw up a will to protect themselves or others from incurring debt upon the death of a primary borrower or cosigner. Forty percent said they would buy insurance to cover the debt. Nearly one-third said they would seek financial advice and/or increase their individual insurance coverage (31 and 30 percent, respectively).

Preventing a legacy of loss

It can be difficult not to share the responsibility for paying loans and credit cards. How many 18 year olds would get student loans if their parents didn’t cosign? How many couples could afford to buy homes if they didn’t apply for mortgages on the basis of their combined incomes? And how many middle-aged adult children are providing their elderly parents with financial assistance?

Insurance can be the answer. Most lenders offer inexpensive coverage for death and disability of the primary borrower. Cosigners can purchase coverage that covers the loan if the primary borrower dies.

Simple term life insurance also is inexpensive, especially for younger healthy individuals. Though individual term life does not directly pay debts, the surviving cosigners can use the benefits to pay off loans for which they have become solely responsible.

Comments from respondents in the Securian survey describe the anguish they feel at the thought of saddling their survivors with debt. The good news is that there are many options available through financial institutions and financial advisors that help prevent an unwanted inheritance – or legacy – of debt.