What happens to your debt when you die

When someone dies, their debts do not follow them and they do not automatically fall on the family. What happens is that the estate — everything the person owned personally — is used to pay what they owed, and the beneficiaries receive what remains. If the estate is not enough, the shortfall is generally borne by the creditors rather than by relatives, unless a relative is separately liable.

That “separately liable” carve-out is where the real risk sits, and it catches families out. A joint borrower is liable for the whole debt, not half of it. A guarantor has promised to pay if the borrower does not, and death is not an excuse. Neither of those obligations is affected by the deceased’s estate being insolvent.

The other thing that catches people out is timing. Debts are paid before beneficiaries are, and the estate cannot distribute until it knows what it owes. A household that needs money immediately — to keep paying the mortgage, to cover school costs — cannot wait for an estate to be settled. That is the practical argument for nominated insurance proceeds sitting outside the estate.

Where insurance fits

Cover directed to a nominated beneficiary generally does not enter the estate, so it is not available to the deceased’s creditors and it arrives without waiting for the estate to be settled. Cover that falls to the estate does the opposite: it becomes an estate asset, and debts are paid from it first.

Neither is automatically right. If the aim is to clear a mortgage so the family keeps the house, cover reaching the surviving borrower directly is usually the cleaner route. If the aim is to give an estate the liquidity to settle a personal guarantee without selling the family home, directing proceeds into the estate may be exactly what is needed. This is where an adviser and a solicitor should be in the same conversation.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Whether any debt is in joint names, because that liability survives in full for the other borrower.
• Whether you have given a personal guarantee for a business, a lease or a loan.
• Whether your mortgage lender has a right to require repayment on death, and on what notice.
• Whether the estate will have any liquidity at all, or is entirely tied up in property.
• Whether insurance is nominated away from the estate when the estate is the thing that needs the money.
• Whether a business debt is covered by business insurance rather than falling on personal cover.

Every New Zealand insurer writes life cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• An adviser sizes cover against the actual debt picture, including guarantees people forget they have given.
• They can structure some cover to reach the family directly and some to give the estate liquidity, where both are needed.
• For business owners they separate personal cover from business debt protection so one is not silently doing the other’s job.
• They review cover when debt changes, which is usually when the shortfall appears.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.