If you’ve cosigned student loans for your kid’s education, you need to protect yourself (and the rest of the family) with a term life insurance policy.
Updated August 18, 2020|7 min read
Thinking about life insurance means planning for the inevitable. While it makes sense to purchase life insurance as an adult, it rarely makes sense to buy life insurance for children, so thinking about that particular worst-case scenario is usually avoidable.
The big exception: If you have a college-aged child and cosigned a private student loan with them, you need to consider buying them a life insurance policy. Otherwise, if your child dies, you’ll be stuck paying off the loans. A life insurance policy can help make an unimaginably difficult situation better and mitigate added financial stress.
If you cosigned a private student loan with your child, you should consider life insurance so you are financially protected if something unexpected happens to them
Most federal student loans, with the exception of Parent PLUS loans, are discharged upon the death of the borrower
When shopping for life insurance, consider other debts you share with your child – such as credit cards, mortgages or car loans
Just because your child has student loan debt doesn’t mean you automatically need to buy life insurance for them. If you’re not a cosigner, then you don’t need to worry about that.
But if you have cosigned loans with them, it’s important to understand the two types of college loans:
Federal student loans are issued and guaranteed by the Department of Education, rarely require cosigners, and are discharged upon the death of the borrower. One type of federal loan that may result in needing coverage is the Parent PLUS loans. These loans are also discharged if either you or your child die, but the canceled debt will be treated as taxable income, which can mean a big tax bill.
Private or nonfederal student loans are issued by banks, credit unions, and other lenders. These loans are not guaranteed by the government and are not automatically discharged if a cosigner dies. If you cosigned a private loan and your child dies before the balance is paid off, you could be on the hook for the remaining balance. Some lenders even go into “automatic default” after the death of a cosigner, which means the loan’s balance would be due immediately.
(Automatic default can also be triggered if you die before the loan is paid off; ask your lender about repayment terms and consider purchasing additional life insurance for yourself to allow for this possibility.)
According to the most recent study published in 2019 by the Institute for College Access and Success, 69% of college students from four-year universities graduate with an average of $29,650 in student loans. The student debt level among graduating seniors has increased by at least 1% each year since 1996 (and it doesn’t look like it will be going down anytime soon). Of those loans, about 14% were private loans.
You need life insurance if you and your child cosigned a private loan together or if you’ve taken out a Parent PLUS loan and are worried about a possible tax bill. Thinking about it isn't fun, but doing it now can save you from dealing with massive debt on top of massive grief, should the worst happen.
Don’t wait until graduation — if you’ve cosigned a private loan to fund your college-aged child’s education, you should look into life insurance as soon as the loan papers are signed.
Researching life insurance for someone else — especially your child — can feel really weird. But as long as you can prove insurable interest, you’ve got a legitimate reason to take out a life insurance policy on someone else, and a cosigned loan qualifies as insurable interest.
You can’t do it in secret, though: you need your child’s permission and participation to take out the policy. One small silver lining: buying a life insurance policy for your college student gives you an opportunity to demonstrate good financial planning and talk about the importance of planning for the worst.
Buying a life insurance policy for your college student involves the same steps as buying a life insurance policy for yourself, with a few variations:
Determine your coverage needs
Comparison shop and get quotes
Choose an insurance company and submit an application (you’ll need your child’s assistance for this, as there will be health and hobby questions for them to answer)
Provide proof of insurable interest (your cosigned loan counts)
Arrange for your child to undergo a free insurance medical exam
Wait for underwriting approval
Sign your policy, set up automatic payment for your premiums
When considering buying a life insurance policy to cover cosigned student loan debts, you just need to ask two questions:
What is the loan balance plus interest?
How long will it take to pay off?
While federal loans have set interest rates, private loans have the choice between fixed or variable interest rates, so they can potentially be much higher. For variable-rate private student loans, the interest rate often starts around 4.5% to 4.9%, but it can increase to as high as 11% to 12.5%. Fixed-rate private student loans typically have interest rates between 6% and 13.5%.
So, for example, if your interest rate for a private student loan is 7.99%, a $13,600 loan with a term length of 10 years will end up costing nearly $19,800 with interest. It’s worth accounting for the full amount when you shop for coverage.
Your policy should cover the full amount of the loan plus interest and should last as long as the loan will still have a balance.
The cost of a life insurance policy for your college student is dependent on several factors, including:
Your child’s age
Your child’s health
Though ballooning student loan debt is leading to an increase in policies that cover cosigners, life insurance policies under $50,000 are still relatively rare (though special short-term policies do exist to help older people cover end-of-life expenses). You may have to call an insurance agent or broker to get an accurate quote for your situation.
Based on policies offered by Policygenius in 2020, a healthy 19-year-old male with no family history of disease can get a 20-year $25,000 policy for just $8 to $10 a month. Those premiums are a small price to pay for security.
There are two main kinds of life insurance: whole life and term life. Whole life is a type of permanent life insurance that has a cash value and never expires — it also costs five to 15 times as much as term life insurance. Term life insurance is more straightforward: you purchase a policy for a set term, and if the policyholder dies during that term, the beneficiary receives a death benefit.
Term life is the right kind of life insurance for most people, and it's the kind of policy you’ll want to buy to cover a debt like student loans.
So, we recommend starting your search with insurance companies that offer term life insurance.
Other factors to consider:
Is the company a good match for your child’s health? Some carriers offer better rates than others for certain health histories — for example, one carrier might be more competitive if your child has diabetes; another might be more favorable to a history of depression.
What types of policies or riders do they offer? You already know you want term life insurance, but there are other policy features you may be considering, like an accelerated death benefit or a return of premium policy. If so, it’s important to choose a carrier that offers those features!
What can you do electronically? Some life insurance companies are still living in a paper and fax machine world (really). If it’s important to you to deal with your policy online, go with a more web-savvy carrier.
Is the company highly rated? Life insurance companies are regulated and rated. The [best life insurance companies(https://www.policygenius.com/life-insurance/best-life-insurance-companies/) are financially stable and rated highly by both financial and consumer protection agencies.
Ready to shop for life insurance?
Many families support their college-age kids in other ways that could also make them vulnerable. These include:
If you’ve cosigned a mortgage with your child, the home itself has value, and selling it or even giving it back to the bank could eliminate the debt. However, if you don’t have your own savings or enough cash to make mortgage payments until you can sell the house — or if you and your child live in the home you’ve purchased together — it might make sense to buy a life insurance policy for your child to cover the remainder of the mortgage should they die.
Another consideration: if you’re on the mortgage and you give the house back to the bank, your credit can take a massive hit. A 30-year policy life insurance term policy lines up with a 30-year mortgage and may make sense for you.
If you’ve cosigned a car loan with your child and they die before the loan is paid off, then you as a cosigner can be on the hook for the balance of the loan. Giving the car back is an option, but it will count as a loan you didn’t pay off and can hurt your credit. It generally takes three to six years to pay off the average car loan; it may be worth taking out a 10-year term policy to cover it.
Many parents cosign for their adult children’s first credit cards, which can mean they’re joint cardholders on their account and responsible for the bill. While initial credit limits are generally low, if for some reason your child has a large balance on a cosigned credit card, it may be worth considering a term life insurance policy.
You won’t find “buying life insurance” on a college dorm checklist or course syllabus, but it should be top of mind if you’ve cosigned certain types of student loans with your child. Private student loans and Parent PLUS loans mean you could be stuck with major debt if the unthinkable happens while they are in school.
If your child has a loan that you did not cosign, or if they have a federal student loan other than Parent PLUS, you don’t need to worry about buying life insurance because their loans would be discharged upon death. If, however, you share other types of debt (like a mortgage or car loan) with your child, you should still consider life insurance for them.
A term life insurance policy that covers both the balance (plus interest) and the duration of the loan is what you should look for when shopping for a policy for your child.
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