Debt After Death

What would happen to all of your debt if you died?

That’s a morbid question, but it’s a pretty important one, even for young adults. Back in 2012, ProPublica told the story of Francisco Reynoso, a gardener from Palmdale, California, whose son was killed in a car accident on the way home from a job interview. Reynoso, who made $21,000 a year, was held liable for paying off his son’s student-loan debt, which numbered in the six figures.

Reynoso’s story is, unfortunately, not a unique one. Millennials are the most educated generation yet, but with all those degrees has come a mountain of debt. On top of that, a shaky economy and changing views of work mean many young adults are working as freelancers or contractors, positions that often don’t come with the benefits that can help families cope with financial burdens should something bad happen.

The conversation about what happens to outstanding debts after death is crucial because not all debt is created equal. While a student’s federal loans would be forgiven if he or she were to pass away, the same can’t be said for loans that are taken out from private lenders. And while the tally of private-student-loan debt isn’t as large as the amount doled out by the federal government, it’s still a large sum—more than $150 billion in total, according to a 2012 report from the Consumer Financial Protection Bureau.* And private lenders are often much less lenient when it comes to repayment.

In the 2011-2012 school year, about 1.4 million undergraduate students took out private loans, and as of 2011, 90 percent of private loans involved a cosigner. That means that parents, siblings, aunts, uncles, or even grandparents who happily signed on the dotted line might find themselves saddled with the debt, should something happen to their loved one. The same is true for other kinds of debt from contracts that are cosigned, such as those that come with joint credit cards.

Is there any way for families to protect themselves in cases when a young person with tons of debt passes away? Life insurance is a potential safety net. “If the debt is such that it would transfer to a parent or family member, life insurance can provide a very good and relatively low-cost solution for making sure that debt gets paid off and that family member is not left with that burden,” says Yaron Ben-Zvi, the CEO of Haven Life, an online life-insurance provider.

But, unfortunately many Millennials don’t have life insurance. The milestones that usually spur people to start thinking about such security measures—such as getting married or having kids—are the events that Millennials are delaying. On top of that, fewer young adults are working full-time for companies with traditional benefits packages, which often include some life-insurance coverage.

That leaves Millennials to seek out life insurance on their own, but many aren’t doing that. According to a recent report from LIMRA, an insurance association, and Life Happens, a nonprofit that focuses on life-insurance education, Millennials commonly say that paying for basic expenses gets in the way of buying life insurance, and almost 30 percent listed saving up for a vacation as more important than getting or increasing insurance coverage. Young adults are also likely to seriously overestimate the cost of insurance: The study listed the price of a 20-year, $250,000 policy for a healthy 30-year-old at about $160 per month, but the median guess among young adults was $600.

It’s easy to understand why more young adults don’t have life insurance: The process can feel complex and sometimes involves in-person visits to doctors or insurance agents. And approval for coverage can take several weeks. The multiple-step process can feel discouraging. For their part, Haven Life, which currently only operates in Massachusetts, says they’re trying to simplify that process by allowing prospective clients to sign up online and offering immediate decisions about whether or not coverage is approved (though clients will still need to complete a medical exam within three months).

Even for those whose employers provide life-insurance policies, many don’t quite understand the coverage or its limitations. If someone with life insurance dies, his or her policy will likely pay out somewhere between one year to two years’ worth of his or her salary. In some cases, though, that might not be enough to cover outstanding debts. In addition, Ben-Zvi says that some policies aren’t portable across employers, which could be an issue for a generation that switches jobs relatively frequently.

* This article originally identified Sallie Mae as a servicer of government loans. That business was spun off into a separate company in 2014. We regret the error.