Using Life Insurance to Pay Off Auto Loans

In general, the assets in your estate are used to pay off your debts when you die. If there’s not enough money in the estate to settle the debt, it goes unpaid. However, there are circumstances where other people may be responsible for the remaining balance.

The responsibility depends on how the loan is structured:

• Cosigners and joint owners: If someone cosigns your debt, they’re typically responsible for it after you die. Similarly, a joint owner of the debt is equally accountable. So if you or the joint owner die, the surviving member must pay off the balance.
• Spouses in community property states: In community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — surviving spouses are responsible for debts left by deceased partners. Alaska, South Dakota, and Tennessee have elective community property rules.

Even if no one is legally responsible for your debts after you die, you may still want coverage. A life insurance payout can help your beneficiaries pay off the debt so the money in your estate can go to your heirs instead.