If you have a student loan, purchasing student loan life insurance, student debt insurance, or student loan cosigner life insurance is a wise option.
We know many people that have large amounts of student debt loans (over $100,000). We know many parents who have cosigned for massive amounts of student debt for their child’s college education. Affording higher education is getting more challenging and complex every daily for many families.
If you have a child, grandchild, or spouse with student loans, probably, the last thing on your mind is investing in a life insurance policy to cover this student loan debt. But you would be wise to consider this further to see if student loan life insurance is something you need to purchase.
The Average Student Loan Debt in America
The average student loan debt in the United States is $57,000 for a graduate student, $26,000 for a borrower at a public school, and $31,000 for a borrower at a private school.
Imagine you are a parent or grandparent cosigning a $57,000 student loan and your student unexpectedly dies shortly after graduation. As cosigners, you as the parent or grandparent are now legally responsible for paying the entire $57,000 – scary stuff!
The thought of somebody other than a student having to pay their own student debt can be difficult for many imagine.
Are You A Grandparent Student Loan Cosigner?
Grandparents, can you imagine just entering your retirement years and getting stuck with a $57,000 student loan bill for which you cosigned after the unexpected death of a grandchild? Can you imagine getting ready to buy a new house when your grandchild suddenly dies, and you are now responsible for an additional $57,000 worth of college debt expense for which you cosigned?
I bet this would be a big blow to your finances and your financial plans!
What Happens When You Are A Cosigner On A Student Loan?
When you are a loan cosigner, you are legally and contractually responsible for the repayment of any debt, should the borrower die unexpectedly. You will then find yourself in the unfortunate position of being financially responsible for the entire remaining student loan balance!
You will already be dealing with the trauma and tragedy surrounding the loss of a loved one (this is a high-cost by itself)! Now, imagine you are responsible for a staggering amount of student debt on top of losing a loved one!
So, what can you do if you are in this situation? One of the best things you can do for yourself financially is to transfer your financial risk to someone else. The best way to do this is to buy an affordable student loan life insurance policy to cover the unpaid balance of the student loan. By doing so, you can transfer this large debt risk to a life insurance company.
It can be hard to imagine a loved one dying in the prime of life. But it will be even harder if you are left with crippling financial debt due to student loans in your name or loans you cosigned.
Do I Need A Student Loan Life Insurance Plan?
If you have a federal student loan, then you need not worry about repaying this financial obligation (under current regulations). If a federal loan is subsidized, unsubsidized, a PLUS loan, or a Perkins loan (issued by the college or university the student is attending), then the loan should be discharged if the student borrower dies.
If you have a PLUS loan, and the parent cosigner dies before the college loan has been repaid, this loan should also be discharged or forgiven.
If you accepted any private student loans, cosigned for any loans, are married to a student load debtor, or you live in a community property state, then you should take a serious look at a life insurance policy to protect your surviving family members, should you die unexpectedly.
Most college student graduates are young, so these small policies are affordable.
Your life insurance policy should be large enough to cover any student loans, accrued interest, and other unsecured debt for which you are responsible. You may also want to consider adding an extra $10,000 for unexpected funeral expenses.
Who Should Be The Beneficiary Of Student Life Insurance?
If your parents or grandparents are cosigners for your student loan, then you will want to name them as the beneficiary on the life insurance policy. This is so they can pay the debt you will leave them if your death occurs.
Since a college student will often not have a sufficient job or credit history to secure a student loan, it will be the parent or grandparent taking financial responsibility or cosigning a loan for the student. It may also be the parent or grandparent buying the insurance policy for the student. If so, the parent or grandparent should be the beneficiary of the life insurance policy.
What Other Things Should I Consider?
Some community property states have educational loan exemption rules. Some private financial lenders, like Wells Fargo and Sallie Mae, may discharge a student loan when the debtor dies. Always verify these discharge rules as the lenders change their rules occasionally.
When shopping for student loans, you would be wise to look at the private student loan lender’s death discharge policies in the loan agreement before signing. If one lender has a death discharge policy and another does not (with all other things being equal), you should sign up for the loan with the more favorable death discharge policy. By doing so, you can avoid investing in a student loan life insurance policy.
If you have already signed up for a student loan, and you know you will be responsible for this student debt if an unexpected death occurs, then a student debt life insurance policy will be an important financial tool for you and your loved ones.
So, What Will A Student Loan Insurance Policy Do For Me?
A student life insurance policy will protect your finances and financial future, including your retirement years. An unexpected death can be financially devastating to the surviving family members, emotionally and financially.
When you add funeral costs and any remaining unsecured or cosigned debt (including student loans, auto loans, credit card debt, other consumer debt), transferring the cost of your unpaid student debt to your surviving family members when you die will cripple them financially.
A term life insurance policy can easily protect you and your loved ones should an unexpected death occur.
What Is The Purpose Of A Student Loan Life Insurance Policy?
The purpose of the life insurance policy is to protect you and your finances, should you experience a sudden loss of income. It also protects you if you have an unexpected increase in financial responsibility because of being a cosigner on a student loan.
When you invest in a student life insurance policy, you transfer the risk of financial loss to an insurance company. When the student dies, the beneficiary of the insurance plan will receive the funds from the life insurance policy tax-free. These funds are then used to pay off any student debt or other financial obligations for the one who passed.
Often the best product is a term life insurance policy.
Not All Student Loan Debt Requires Life Insurance
There are many types of student loans, and not all will require repayment if the debtor dies during the loan term period. If you have a federal student loan, you may know they have no cosigner requirement. Federal loans should include a death discharge component in the loan document, which eliminates any remaining student debt, should the borrower pass unexpectedly.
For private student loans, these are an entirely different situation. To qualify for a private student loan, most students will need a loan cosigner.
Why Would A College Loan Need A Cosigner?
Think about this for a moment – most 18, 19, or 20-year-old students will not have sufficient credit history to qualify for a student loan by themselves. This often means a parent or grandparent must cosign for the student loan, leaving them as cosigners and at great financial risk.
Cosigning for a student loan is a loving and generous thing to do as a parent or grandparent. Unfortunately, aside from being a loving thing to do, there is little benefit to the college loan cosigner.
All you, as a cosigner, are doing is assuming unsecured debt and financial risk that will negatively affect your financial future and retirement options.
What Would You Do If You Had An $50,000 Extra Debt Overnight?
If you suddenly were responsible for $50,000-$100,000 in private student loan debt and having to take over those payments, would it mess up your life (both personally and financially)? Would it impact your ability to invest in your retirement, purchase your next dream home, or afford the next car you would like to buy? Probably so for most people!
Adding and additional $25,000 to $100,000+ of debt can be devastating financially to individuals and families. Imagine yourself financially comfortable, but not wealthy, and suddenly being burdened with an additional $50,000 in debt…scary stuff!
What Kind Of Student Life Insurance Policy Should I Get?
The best policy to consider is a term life insurance policy.
With a term life insurance policy, you can choose the exact time you need protection (often the time of the student loan), and the specific amount you want to protect (the total amount of student loans and any other unsecured debt for which you are a cosigner).
A student term life insurance policy will be the most affordable option available for most people. This is especially true with students who are young and healthy (young and healthy people always get the best life insurance rates possible).
Should I Only Insure The Exact Amount Of Student Debt?
Think about including some additional financial protection into your insurance plan for unexpected funeral costs. Often, an additional $10,000 is more than sufficient (unless you can afford to write a check for $10,000, right now, with no financial pain). The last thing you want when a loved one dies is to have to think about where the money will come from to pay for a burial!
Term life insurance policies for student debt are most often purchased from 10 to 30 years (depending on the age of the insured student). Life insurance policies for students can start as low as $10-$15 a month, depending on the student’s age and health information. Often, you can get a discount if you pay annually!
So, I Want To Buy Some Student Loan Life Insurance…What Do I Do Next?
The most important thing is to be an educated buyer! I hope we are helping you become an educated buyer with this article!
We recommend you check to see whether your private loan has an official death discharge policy. Make sure you get it in writing in any loan documents you sign.
If your lender has no policy that discharges loan debt upon the death of the student, then a life-insurance policy will be an important financial safety net for those you love.
How Much Insurance Should I Purchase?
We recommend you not invest in any more life insurance than you need for student loan debts; you can always add more life insurance later as your financial needs grow. We also recommend term life insurance over whole life insurance, as term life insurance will always be the cheapest option. You can check out our term life versus whole life insurance article for more information.
Again, term life insurance policies are typically the most appropriate product to insure any student debt. This is because term insurance can be purchased for a fixed benefit amount and a fixed period. Term insurance is also the most affordable life insurance option for most students and families.
Life insurance for college students or former college students may be wise, depending on the loans you secured. Call us and we can help you determine if life insurance makes sense for you with your or your family’s student loans.
Life-Wealth-Win Life Insurance and Wealth Services would love to help you get your loved ones, family, and business protected! Call us or get your free life insurance estimate by clicking the link below.