7 tips for parents buying life insurance for their college kid
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The cost of college has skyrocketed over the last decade, resulting in $1.4 trillion of outstanding student loan debt. But college grads aren't the only ones on the hook for their balances.
Per student debt analytics firm MeasureOne, last school year, about 93% of undergraduate private student loans had a cosigner. These signatories — most often the student's parents — are jointly responsible for paying back those debts and, thus, find themselves in an uncomfortable situation: They need to buy life insurance for their college kid.
To make the process a bit easier, here are seven tips for moms and dads looking for this type of policy.
It's co-signed private student loans, which are not guaranteed by the government nor automatically discharged if a cosigner dies, that require parents to prepare for the worst.
Federal student loans, which rarely require cosigners, are discharged upon the death of the borrower, so, if your child is borrowing from the Department of Education, you can often skip buying them a policy. There's one exception here: federal Parent PLUS loans, which are discharged after the death of you or your child die, but treated as taxable income. If you fear a big tax bill, it's worth considering a small policy.
There are two major types of life insurance. Whole life insurance doesn't expire, but it costs 4x as much as term life insurance, which covers a person for a set period of time. Fortunately, term life is the way to go if you're looking to cover student loan debt. (In fact, it's appropriate for more people in general. You can learn more about term vs. whole life insurance here.)
The policy should cover the full amount of your child's student loan plus interest, meaning you don't want to go solely off the base amount you and your child are borrowing. It should also last as long as the repayment period. Private student loans typically come in five-to-15-year terms with annual percentage rates anywhere from 3% to 15%.
Even though student loan interest adds up fast, you're probably still looking at buying a small amount of coverage. While the market is changing, policies under $50,000 have yet to become commonplace, so you might need to talk to a broker or agent directly to get quotes. (We can help you start your life insurance search here.)
You can buy a life insurance policy for someone else, but you need to demonstrate what's known as "insurable interest". That's a fancy way of saying you would face financial hardship if the person passed away. A cosigned loan, whether related to college, housing or personal expenses, qualifies. You also need to involve your child in the process: They need to consent to the application process and sign the final policy.
Talking to your teen about life insurance isn't a conversation either of you really wants to have. But you can turn lemons into lemonade by using it as a springboard to other important financial lessons. For instance, you can take about the importance of good credit, building an emergency fund and creating a budget.
Private student loans are known for some very fine print. For instance, some lenders stipulate a loan go into “automatic default” after the death of a cosigner. That means the balance would become due immediately after the death of you or your child. If your loan contains that clause, make sure your life insurance policy accounts for the debt. If not, consider upping your coverage.
You can find a full guide to buying life insurance for your college kid here.
Disclaimer: Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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