Do you have a new grad in your life who you’re struggling to find the perfect graduation gift for? How about taking a shiny new life insurance policy on them? It’s happened before, and although it seems like a mean-spirited joke, it’s actually a savvy financial move.
Why? Because if you co-sign someone’s student loans, life insurance is a good safety net to ensure that you’re not on the hook for repayment if the worst happens.
Over 90% of private student loans are cosigned, usually by a parent or grandparent. Meanwhile, student debt continues to increase, with the Class of 2016 averaging out to over $37,000 in student loan debt per graduate.
While the thought might be grim for most parents, the reality is that a cheap life insurance policy on adult children is an easy way to protect yourself from financial ruin.
What loans do I need to protect myself from?
Not all student loan debt is created equal. Federal student loans and private student loans are two very different beasts, with different rules and strategies for how to deal with them.
First off, if your child only has federal student loans, you don't need to worry about repaying their loans. Federal student loans are automatically discharged after death.
If the student has private student loans, the lenders are allowed to use money from the deceased's estate to pay off the rest of the loan. Assuming that most twenty and thirty-somethings don't have a particularly large estate, the lenders will take what they can get and discharge the loans.
But most private student loans aren't taken out solely by the student. Since students have short (or nonexistent) credit histories, private lenders usually ask for a cosigner - which usually ends up being mom, dad, or a grandparent.
Private student loans account for approximately 6-8% of all student loan debt according to a report by US News, totalling $90 billion outstanding loan debt. The majority of that debt is saddled on graduate students, who don't qualify for federal grants.
How can life insurance protect me?
At PolicyGenius, we suggest that people get term life insurance. Why? Term life insurance lasts for a specific period of time (referred to as the "term"), which is perfect for covering student loan debt that will be paid off within a decade or two. Common terms are 10, 20, and 30 years long. If the person covered by the life insurance policy dies within that term, the beneficiary (in this case, their parent) will receive a death benefit. The death benefit is a tax-free lump of cash that can be used to immediately pay off your child's student loans.Buying life insurance for your adult child isn't the "normal" way to shop for life insurance - usually, people are buying life insurance to cover their own lives. Because of that, the usual shopping advice doesn't apply. Instead of taking a holistic look at your child's financial life, you only need to answer two questions: how long will it take for them to pay off their loans and how much is left to pay off? The answers to those questions will help you figure out how long the term of the policy needs to be and what the death benefit should be. The death benefit should be big enough to cover your child's outstanding student loan debt. Remember, you only have to cover the loans that you've co-signed, which is most likely lower than your child's total student loan debt. This number will be different for everybody - it could be as low as $10,000 or as high as $100,000. The length of the term should match how much time it will take your child to repay their loans. For example, if it's going to take your child fifteen years to repay their loans, the term of the life insurance policy should be between 15 and 20 years.
How much will it cost?
You won't know until you run a quote with your specific information, but assuming your child is healthy, you can expect to pay around $10 per month. Depending on how long the term of the policy is, the total cost of the policy will be between $1000 and $2000. Think of it like adding another $1000 to your child's student loans, or another $10 to their monthly student loan payment. You can decide with your child whether you will foot the bill or if they will, but either way, it's an affordable path to protection.
Am I really allowed to take a life insurance policy out on my adult child?
In short: yes.
When buying policy for any family member, you have to prove what's called "insurable interest." To prove insurable interest, you just need to prove that if that family member died, you would take a significant financial hit. If you're working with an independent broker like PolicyGenius, you can start by showing them your child's student loan balance.
You won't be able to take out the policy without your child's participation, however. They'll need to undergo both a phone interview and a medical exam. The medical exam will be free.