Today's economy

What happens if you die in debt?

By Kevin Press,

Comments (15)

I’ve been travelling a little bit over the last couple of weeks, presenting the findings of our 2013 Sun Life Canadian Unretirement™ Index. One section in particular — on our attitudes about debt and retirement planning — has What happens if you die in debt?triggered discussion.

A couple of highlights:

  • When asked to name their top financial priority, 45.3% listed paying down personal loans, other debt or credit card balances. By comparison, 23.1% said saving for retirement was their number-one financial concern.
  • Almost half (44.1%) of Canadians are paying down mortgage debt as opposed to saving for retirement.

I’d argue retirement savings is a key priority, but these numbers make sense at a time when household debt — relative to income — is at a record high in Canada.

There are other findings, though, that suggest these good intentions may not be enough. We asked our respondents under what circumstances they’d take on debt in retirement:

  • 11% would take on debt to buy a car.
  • 6.6% would to renovate their home.
  • 6.5% would to help their children.
  • 4% would to buy a home.
  • 1.9% would to invest.

Just 35.2% told us they would not take on additional debt in retirement. And only 21.3% said they would delay retirement until they are debt-free.

Then this: Is it important to you that you do not die in debt? A sizeable minority — 27.2% — said “No, it does not matter if I die in debt.”

What happens if you die in debt? - Debt chartt

I called Douglas Gray, co-author of The Canadian Guide to Will and Estate Planning on Friday to get his reaction. “That’s a bit of a shocker,” he told me. “I feel very surprised by that result.”

Gray explained that there are three types of creditors: preferred creditors (Canada Revenue Agency is an example); secured creditors (like the bank that’s holding your mortgage loan); and general or unsecured creditors (everybody else). Preferred creditors get paid first, followed by secured creditors and then unsecured creditors.

“All the creditors have to be paid out [of your estate] first before any beneficiaries are paid out,” he said. “That’s the law.”

If there aren’t enough assets to pay off all the creditors, then some have to take a loss. Let’s say the deceased has enough to pay his or her preferred and secured creditors in full, but has just $50,000 left over to pay off $100,000 owed to general creditors. Those creditors would have to settle for 50₵ on the dollar.

This applies whether or not you have a will. (Gray provided more detail on the consequences of dying without a will earlier this year.)

So, does it matter if you die in debt? It does to the extent that your goal is to leave something for the beneficiaries you’ve named in your will.

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Weekend Reading: Merger And Acquisition Edition on

[…] June 17, 2013 · · I’ve been travelling a little bit over the last couple of weeks, presenting the findings of our 2013 Sun Life Canadian Unretirement™ Index. One section in particular — on our attitudes about debt and retirement planning — has triggered discussion. Open this article […]

Chinook on

Wow. and you wonder why the younger generation has no concept of money management and exudes airs of entitlement. Monkey see, monkey do. SInce when does one assume others want to pick up your mess? CRA has to go after the money owed…guess who pays for that effort? Where is the ownership of financial responsibility? This pains me.

Brian Poncelet, CFP on

What is interesting here is the “wisdom” taught in the media is buy term and invest the difference.
Later in life many people in their 60’s want life insurance. Why? lots of reasons, debt is just one. That is why BMO CPP (the ones with the “no medical” ads on TV) sell small policies by the hundreds every month. In a nutshell, these policies are whole life and have a much higher cost.

So having some permanent coverage in retirement is like owning property. When is the best time to buy? When you are young and healthy. Later in retirement one can buy an annuity and get 6-9% guaranteed for life (after 65) and be fully protected!

Dara Kennedy on

Can family, especially a spouse, be held responsible for the debt?

    Kevin Press on

    Thanks Dara. We received this same question on Facebook. I reached out to Douglas Gray, and he provided this answer: “No, the creditor cannot sue the heirs for their cash, if the heirs did not sign any legal documentation to say the heirs were jointly liable for the debt of the creditor before the death of the creditor, eg personal guarantee, joint signatory on the promissory note, co-signor, co-indemnifier, etc.”

Robyn on

Great article and so much good information shared here! Becoming debt free and finding ways to save money are a huge goal in my life. I have found so much help from the book, “Practical Steps to Financial Freedom and Independence: Your Road Map to Exiting the Rat Race and Living Your Dreams” by author Usiere Uko. This book will get you thinking about your life!

Canadianbudgetbinder on

That makes sense from that perspective. I think we need to get rid of that “I don’t care” mindset and try to tie up all major debts as soon as possible. If you named beneficiaries in the will then you must have wanted to leave something to them. The hard part would be if someone passes before all of the loose ends and debts are taken care of. Thanks for an informative post and how each get paid.

Yvon Robichaud on

what about insurance policies or Seg funds to a named beneficiary. would they be confiscated to pay down the deceased debt?

    Kevin Press on

    Great question Yvon. Here’s an excerpt from a good piece published by the Canadian Life and Health Association: “When the contract’s named beneficiary is a spouse, child, grandchild or parent of the
    insured person (or, in Quebec, the contract owner), when the beneficiary is designated
    irrevocably or where the contract is registered (for example, as a Registered Retirement Savings Plan), creditors cannot seize a segregated fund contract if the contract owner declares bankruptcy or fails to pay his or
    her debts, as long as he or she has not entered into the contract for the primary purpose of
    shielding assets from creditors. Courts of law have deemed the purchase of segregated fund
    contracts while the contract owner was insolvent to be an attempt to shield assets, and have disallowed the creditor protection in those cases.” You can find the full document here:$file/Brochure_Guide_To_SegFunds_ENG.pdf

    chancecallan on

    The key is to ensure your assets exceed liabilities at all times. When you die your assets are liquidated to pay off debts and residuals go to whomever has been named as beneficiary.

Rosemary Wells on

As retirees, there is some merit to using your financial resources while you are alive versus making sure you leave something for beneficiaries beyond a nic-nac or piece of jewellery. So long as there are sufficient assets to pay all creditors at the time of death and your funeral is pre-paid, why not use your hard earned financial assets? The trick, of course, is to maintain a close eye on the debt so as to ensure assets exceed liabilities. My husband and I want to leave our 4 adult children a little something so we have set those funds aside. The rest is ours to spend and enjoy as we see fit…..and that will probably mean using the HELOC to pay for trips or a new vehicle.

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