Does Life Insurance Pay Debts? 
Individuals and businesses often look to life insurance to provide funds for loan repayment . Many creditors require a collateral assignment of the policy to the creditor `` as its interest may appear '' . Income tax free policy death benefits are first used to repay the outstanding debt and interest due . If a collateral assignment was used , the payments are made directly by the insurance company to the creditor . Any balance of the death benefits will go the beneficiary . 