Some 50% of Americans don't have life insurance. Are you one of them? If you die without life insurance, any assets you left behind will be distributed to your heirs, but your loved ones won't receive an insurance payout. That may leave them to cover your funeral costs and unpaid debts on their own.
What Happens if You Die Without Life Insurance
When you die, your estate is distributed among your surviving family. "Estate" simply means everything you own—investments, savings accounts, home, car and more. You may have a will specifying who gets what. If you don't have a will, your estate goes through probate, where a judge determines how your assets are handed out.
Your assets will be used to pay your outstanding taxes and debts (more on that below). What's left will go to your family. Even if you don't have significant assets to leave your loved ones, life insurance helps them cover costs related to your death, as well as their own living expenses after you're gone.
Should you die without life insurance, your family will have to pay out of pocket for expenses including:
- Your funeral: On average, a funeral and burial costs $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 to rely on, 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 nonprofit research and advocacy group Child Care Aware of America.
- Lost benefits: Did your family receive health insurance through your job? Were you contributing to an employer-sponsored 401(k)? Losing these benefits can put the squeeze 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.
While laws may differ from state to state, community property states usually hold spouses responsible for each other's debts—even debts they didn't know existed. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (In Alaska, spouses can choose to hold their property in community.)
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 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.