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You’ve opened doors for your kid by cosigning student loans — now protect yourself (and the rest of the family) with a term life insurance policy
Life insurance, by definition, requires thinking about death, and that’s never fun. But most of the time, buying a policy just means thinking about your own death. 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’ve cosigned a private student loan with your child, you need to think about the unthinkable and buy him or her a life insurance policy.
Read on to find out:
Just because your child has student loan debt doesn’t mean you automatically need to be shopping for life insurance for them. If you’re not a cosigner, then you’re off the hook and can go back to thinking of only the best-case scenarios. 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 Institute for College Access and Success, 20% of college graduates take out private loans, 90% of those loans have a cosigner, and the average balance of private loans is $13,600.
If you’ve cosigned a private student loan or taken out a Parent PLUS loan and are worried about a possible tax bill, you need to buy life insurance for your kid. Thinking about it isn't fun, but doing it now can save you from dealing with massive grief and massive debt later, should the worst happen.
Researching life insurance for someone else — especially your kid — can feel really, 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:
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.
When considering buying a life insurance policy to cover cosigned student loan debts, you just need to ask two questions:
While federal loans have set interest rates, private loans have variable interest rates, so it’s important to factor that in. For example, the average overall interest rate of private student loans is 7.99%, so a $13,600 loan with term length of 10 years will end up costing nearly $19,800 with interest. It’s worth accounting for the full amount.
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:
Though ballooning student loan debt is making policies to cover cosigners more and more common, policies under $50,000 are still relatively rare in life insurance (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.
One sample price quote: A healthy 19-year-old 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.
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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 the right kind of life insurance for most people, and it’s kind of policy you’ll want to buy to cover a debt like student loans.
So start 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 you 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 are financially stable and rated highly by both financial and consumer protection agencies.
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 he or she dies 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 takes 6 to 7 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.
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