Death is a fact of life, but not everyone is prepared for it. In fact, in 2024, the LIMRA Insurance Barometer Study found that the rate of self-reported life insurance ownership in the United States was a mere 51%. Life insurance provides a safety net for the insured, so that when they pass away, their final expenses and any bills outstanding at the time of their death aren’t passed on to their surviving family members. Without a life insurance policy or significant financial assets available for these expenses, the burden of their payment may unintentionally pass to loved ones.
There is no requirement for an individual to have life insurance, and it may be a conscious decision for someone to not have life insurance (e.g., if they have significant financial assets that will become available upon their death, including unused retirement funds, cash in checking and savings accounts, equity from property to be sold upon death, or funds in investments). However, for individuals without a significant estate, life insurance can reduce any financial burden associated with their deaths that might pass to their loved ones. It can provide the cash necessary to cover immediate and longer-term expenses associated with the death.
So what happens if someone passes away without life insurance?
Without life insurance, debts and expenses may pass to the survivors of the deceased, who may not be financially equipped to handle these unexpected costs. Consider the following:
Final Expenses
When someone passes away, there may be money contained in their estate that can be used for their funeral and burial expenses. However, if someone passes away with little money to their name, their survivors may be on the hook for their final expenses. Something must be done with the body of the deceased – and these services, whether a traditional burial, burial at sea, or cremation is chosen, cost money. The average cost of a funeral in 2023 was $7,848. This doesn’t include the costs associated with a wake, a final outfit for the deceased, and travel costs for family members. These all add up.
Depending on the manner of death, if the deceased is a veteran, there may be a limited reimbursement available from the Veterans Benefits Administration and the National Cemetery Administration. However, this amount is unlikely to cover the full costs associated with a funeral and burial. Further, this support will only be available after survivors have applied for and been awarded these benefits, a process that regularly takes weeks or months to resolve.
It is also important to note that most veteran benefits end with the veteran’s death. It should never be assumed that survivor benefits are automatically available for the surviving spouse. Only a small number of spouses continue to get money from the Department of Veterans Affairs as survivors. These benefits must be applied for, and are only awarded if the veteran met specific criteria.
To mitigate the potential problem of survivors paying out of pocket for funeral and burial costs, an individual might consider a small permanent insurance policy or a final expense policy. These are likely to be lower cost than larger policies meant to create an estate and pass generational wealth to survivors.
Taxes
There are few things that are certain in this life, but death and taxes are two of them. It may come as a surprise that a deceased individual may still owe money to the government, but it is true that a survivor will need to file the final year’s taxes on behalf of the deceased. If the deceased was married, their spouse can continue filing taxes (married filing jointly or married filing separately) as normal. However, if the deceased was unmarried, a personal representative must submit their final tax return. When submitting the tax return, the individual filing on behalf of the deceased can note that the individual has passed away. There is no other IRS notification required.
If the deceased owed back taxes or owes current taxes to the IRS, their estate is liable for making those payments. If these payments are not made, the IRS can place a lien on the estate and the money owed the IRS must be repaid before any other debts are settled. If the estate does not have the funds, the representative of the deceased may be able to qualify for a payment plan or installment agreement, but ultimately may become liable for the unpaid taxes.
Unpaid Debts
Depending on the financial status and lifestyle of the deceased, they may have passed away with active debtor accounts to their name. For example, they may not have fully paid off their mortgage, their most recent car purchase, or their credit card. They may have outstanding medical bills. These may transfer to survivors after a death and create a financial burden.
- For any assets for which someone jointly owns the asset, the joint owner will become fully responsible for the remaining debt. This typically applies to mortgages (for a home, investment property, or business) and vehicles.
- For any assets for which someone cosigned – for example, if a credit card had two account holders or an individual cosigned on a personal loan or a private education loan – the remaining balance will transfer to the cosigner, who is now liable for those payments.
- Depending on the deceased’s location, they may live in a community property state. If they were married at the time of their death, regardless of whether assets were jointly owned or cosigned for, their spouse may assume responsibility for debt repayment.
Typically, the funds for repaying debts come from the deceased’s estate. If there is no cash available for these payments, survivors may have to liquidate investment accounts or consider selling larger ticket items (e.g., a home) to create the cash flow necessary to pay off the remaining debts. Most debt is not forgiven with death, so it is possible, if these payments are not made in a timely manner, that debt collectors could reach out to family members of the deceased for payment. While debt collectors are legally allowed to contact the deceased’s spouse, parent or guardian (if the deceased was a minor or incapacitated), the executor or administrator of the estate, and anyone else who has access to funds contained within the estate and can make payments on behalf of the deceased, they are not allowed to harass survivors, especially if they are not liable for the payments.
It’s important to note that medical bills, which may add up toward the end of an individual’s life, are not forgiven upon an individual’s death. Medical debt collectors will attempt to collect the balance due from the estate or, if the deceased was a minor, from the deceased’s parents.
The unfortunate reality is that an individual’s death may have unintended financial consequences for their surviving loved ones. Unless the individual is wealthy, the best way to mitigate the financial burden that may be passed to survivors is to purchase a life insurance policy that will provide at least some funding for expenses that remain after one’s death. Navy Mutual provides both term and permanent life insurance policies to fit your budget and your needs. Contact a representative or get a quote today!