As baby boomers age, a wave of inheritance known as the “great wealth transfer” is underway. What also lies ahead: a major debt transfer that younger generations of Americans will have to manage.
According to a survey by PolicyGenius, more than 46% of Americans expect to transfer their debts to their loved ones when they die. The average American household has $10,000 in credit card debt, $58,957 in student loan debt, $241,840 in mortgage debt and $22,612 in auto loans.
“Debt does not miraculously disappear when someone dies, and any outstanding debts are paid off from assets such as real estate, retirement accounts, and bank accounts,” Rosalyn Glenn, a financial planner at Prudential, told Yahoo Finance. “If you have assets, your debts can be transferred in the event of your death, and if you don’t have a debt management plan in place, you are putting your family at risk.”
As many make New Year's resolutions related to their health, it's a good time to review the status of your assets – especially your life insurance coverage. Instead of passing on debt to your loved ones, your legacy is one of financial management and wealth building.
“Unfortunately, there have been cases where families have been displaced due to loss of income and the surviving spouse's inability to maintain the mortgage on a single income,” Glenn said.
Life insurance to mitigate debt transfer
According to PolicyGenius, 21% of Americans who expect to be left with debt when they die do not have life insurance.
“One of the benefits of life insurance is that it provides security in the event that a loved one dies, and it leaves you responsible for paying off shared debts, such as a mortgage,” Shardéa Ages, certified financial planner at Collective Wealth Partners, told Ages Yahoo Finance. “And the best part is that, in most cases, life insurance proceeds are tax-free.”
When it comes to student loan debt, a lot depends on whether it's federal debt or private loans.
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“Federal student loans are forgiven upon the death of the borrower, but some types of student loans issued by private lenders may be passed on to dependents upon the borrower’s death, particularly if the loan was co-signed,” says Jessica Ruggles, corporate vice president of financial Wellbeing at New York Life told Yahoo Finance.
Inequalities in wealth – and in debt
The PolicyGenius study found that households earning more than $150,000 had more debt than lower-income households, but higher-income households were better prepared to help their loved ones pay off that debt. Only 13% of higher-income households had no life insurance, compared to 31% of lower-income households.
The study also found racial disparities in debt that contribute to the racial wealth gap, noting, “Black and Hispanic Americans have a harder time accessing credit to make larger purchases, such as real estate, that can help them become wealthy.” to build and pass it on to future generations.”
For most people, the proceeds from home ownership and life insurance are typically how they pass on their wealth to family members from generation to generation.
Jason and Shannon Phleger look at the damage to their property after flooding in Boulder Creek, California, on January 16, 2023. (Photo by JENN CAIN/AFP via Getty Images) (JENN CAIN via Getty Images)
The Black homeownership rate is 45.5%, and during the pandemic housing boom, many Black homeowners missed refinance opportunities to access equity and lost equity in home sales due to appraisal errors.
Hispanic homeownership is slightly higher at 48.6%, but still lags behind white homeownership at 74%.
Many black and Hispanic households also miss out when it comes to life insurance.
About 56% of Black Americans have life insurance, but many are underinsured, meaning their benefits are insufficient to replace income or facilitate wealth transfers across generations due to a misunderstanding of how life insurance works and a distrust of the industry as a whole .
Only 42% of Hispanics have life insurance. Trust issues, language barriers and cultural differences are keeping Hispanics from buying life insurance, an important infusion of money that could help close the wealth gap in the Hispanic community.
Making matters worse, financial planning professionals are underrepresented: Only 1.8% of certified financial planners (CFPs) are Black and 2.7% are Hispanic.
Life insurance protection during your life
Although most conversations about life insurance revolve around death, some life insurance policies offer benefits that the policyholder can claim during their lifetime.
“Life insurance is also for the living,” Glenn said.
Unlike term life insurance, permanent life insurance lasts for life and generates a tax-deferred cash value in addition to the death benefit. The cash value can be used in the form of a loan or withdrawal during the policyholder's lifetime.
More and more Americans are using their permanent life insurance policies to weather inflation and avoid dipping into retirement accounts.
Financial planners generally recommend a combination of term life insurance and permanent life insurance.
Read more: Your step-by-step guide to filing a life insurance claim
Types of Permanent Life Insurance Products
It is important to regularly assess your financial health and adjust your financial plans to accommodate life changes such as births, deaths, divorces and health problems.
Ronda is a senior personal finance reporter at Yahoo Finance and an attorney with experience in law, insurance, education and government. Follow her on X @writesronda