Using Life Insurance to Cover Student Loans

When planning for your future — or your child’s — it is easy to think of all the wonderful things: going to college, getting a fine education and starting down the path to an excellent life. But there are some not-so-rosy sides to thinking about the future, such as considering the need for life insurance for college students. At a time when many young adults are entering school without a family or financial obligations, it may seem strange to consider a large life insurance policy. But what many parents and children do not think about is the situation where death could occur and large student loan bills could loom.

Why consider life insurance for students?

In most cases, students heading off to college do not have a mortgage, a family to support or other financial obligations. In these cases, purchasing a large life insurance plan may seem strange. But as the cost of college increases, along with the amount of student debt accrued after four years of education, the reality is that losing a child or family member who has not repaid their student loans could leave you with a financial nightmare. This is especially true for family members who co-sign for students so that loans can fund their education; co-signers are often held responsible for remaining debt in cases where the primary borrower has stopped making payments, even in situations of death or disability.

Unlike many forms of debt, student loans do not necessarily go away when the borrower dies. While federal student loans are often forgiven, private loans are not legally required to do the same, meaning a co-signer dealing with the loss of a loved one could remain responsible. And to make matters worse, student loan debt often cannot be discharged during bankruptcy, meaning that if you are required to make payments but cannot meet the monthly cost, bankruptcy will not help.

What about college graduates?

The difficult truth of student loans is that they usually do not disappear quickly after graduation. For this reason, many people pay back educational loans into adulthood, even as they get married and raise families. Life insurance policies with enough room for student loan debt can help protect your family from financial burdens in the event that you die before the loans are repaid.

Do I really need life insurance to cover student loans?

While it is easy to see life insurance as another monthly expense that likely will not be used, mounting student loan debt should be a factor in decided whether to open a policy. If you are not sure if it is the right kind of financial protection for you, consider these factors:

• Does your student loan lender offer death discharge? This is when lenders agree to erase debts owed if the student dies before they are repaid. If the lender does not, life insurance can be a strong financial safety net.
• Are your student loans provided by the federal government or a private entity? Government and private loans operate by different sets of rules. Generally, government-issued student loans are wiped clean upon a student’s death, while private loans are not.
• Is your student loan co-signed? For private loans, co-signers can be responsible for the cost of your unpaid debt, even in the event of your death. If this is the case with your loan, protecting a co-signer, just in case, can prevent burden at a rough time.

It is important to know the terms of your student loans (or those of a child or family member) when it comes to setting up safeguards. Doing so can help keep financial stress at bay during already difficult times.

What kinds of life insurance policies are available?

Life insurance generally comes in two options: term life and whole life. Both provide a payout in the event of you or a loved one’s passing, but term and whole life policies operate in two different ways. And, both kinds can be used to pay loan debt after a student’s death.

Term life insurance policies: Term life policies are designed to give you life insurance coverage but only for a period of time. For this reason, they are often more affordable than other kinds of life insurance policies. Term life insurance comes in pre-determined increments of time such as five years, 10 years or 20 years and can be used if the policyholder dies within that interval. If the covered person does not die, the plan simply expires when the interval ends. A large difference with term life policies is that they have no cash value, meaning that you cannot cash out your policy while living (that is cancelling the plan and receiving the money you have paid into it). While it may seem strange to invest money into a policy that will not retain value if you keep living, term life policies are a strong option in times where you have more financial responsibilities than income — such as while in college with student loans.

Whole life insurance policies: Whole life policies can also be used to help with student loan expenses in the case of death, but they function a little differently than term life insurance policies. Whole life policies do not have terms and do not expire, hence the name “whole life.” One perk to this kind of policy is that it cannot be canceled so long as you pay your premium on time each month, so there is no concern about changing health conditions affecting life insurance. In addition, whole life policies can be cashed out during your lifetime, meaning that money that has been paid in premiums can be borrowed and used on big expenses such as a college education or a down payment on a home. Whole life premiums are often more costly per month, but in the long run, this kind of insurance policy can be a beneficial financial tool.

Both kinds of life insurance policies are effective safety nets for student loan debt.

How large of a policy should I get?

It is difficult to say for sure how large of a life insurance policy you should take out, especially when it comes to incorporating the potential of paying back student loan debt. But, there are factors that can help you determine the amount to insure yourself or a child in college for:

• How much income does my spouse or child need to survive without me?
• What personal and family obligations do I have?
• What persona, family or business debts do I have?
• What living expenses will my family face without me?
• What is my income, and how will my family get by without it?
• How much student loan debt do I have, and how much am I anticipating paying in interest?

Buying a policy

Countless private insurance companies offer life insurance, and it can be hard to determine where to find the best policy at the most budget-friendly price. If you are not sure where to start, let PolicyZip help. Our life insurance specialists are here to help you make the most of your life insurance policy selection.