Taking out a life insurance policy as a new college graduate may not be top of mind, but it’s worth exploring if you have student loans. Some of that debt can live on, even if you die.
“That’s not something that college-age students and their parents tend to think about,” said Betsy Mayotte, director of consumer outreach and compliance for American Student Assistance, a nonprofit focused on higher education financing.
Four in 10 student borrowers now owe at least $ 20,000 at graduation, double the share from a decade ago, according to a new report from the Consumer Financial Protection Bureau. Over the same period, the number of those owing at least $ 50,000 has more than tripled, from 5 percent to 16 percent of borrowers.
If a relative or friend has co-signed on a student loan for you, and you pass away, that co-signer may be responsible for continuing to make payments — or in some cases, even immediately owe the full outstanding balance, Mayotte said. (If you live in a community property state, your spouse may be liable for student loan debt you incurred during your marriage, even if he or she didn’t co-sign.)
Insurance can be cheap peace of mind to hedge that risk. A $ 250,000, 10-year term policy on a 25-year-old runs roughly $ 100 per year, said John Ryan, a certified financial planner and the principal of Ryan Insurance Strategy Consultants in Greenwood Village, Colo.
“It’s so reasonable because it’s not likely we’re going to have a young person pass away,” he said.
To figure out how much coverage, if any, you need, start by assessing your loans. Check the terms to see what will happen to that balance in the event of your death.
Federal student loans are typically discharged if the borrower dies, per Department of Education guidelines; so are federal PLUS loans a parent takes out, if either the parent or the student dies. But that forgiven amount may have tax consequences, Mayotte said.
“There still could end up being a bill to the estate,” she said.
Some, but not all, private loans will also forgive the balance in the event of the borrower’s death or disability, Ryan said. Check with your lender about those provisions.
If you decide coverage is warranted, look for a term policy that covers the amount of the debt for the full repayment term, said CFP Carrie Jones, a senior planner with Life Planning Partners in Jacksonville, Fla.
Even though the amount at risk diminishes over time as the grad repays his or her loans, applying for one policy is typically less expensive and easier to manage than a layered strategy, she said. That would be, for example, covering a $ 50,000 co-signed loan balance with one $ 25,000, 20-year life insurance policy and another $ 25,000, 10-year policy.
“It’s actually cheaper to keep a $ 50,000 policy for 20 years,” Jones said. “A $ 50,000 policy is not twice as much as a $ 25,000 policy.”
But if you’re concerned, some insurers will let policyholders reduce the amount of coverage, one or more times over the term of the policy, said Ryan of Ryan Insurance Strategy Consultants.
“When shopping, that should be a question they ask,” he said.
Ideally, the parent or co-signer should be the owner and beneficiary of the policy on that graduate, said Jones with Life Planning Partners. That removes any worry that a cash-strapped new grad could cancel the policy or fail to keep up with payments.
If there later becomes another need for the insurance — say, your grad gets married or develops a medical condition that would make him more expensive to insure — then ownership of the policy can often easily be transferred from parent to child, she said.
In that worst-case scenario of a young grad’s death, cosigners faced with unexpected student debt obligations could ask about “compassionate review” options, said Mayotte at American Student Assistance. That may lead to loan discharge.
“Even though more private lenders are open to the idea of discharge, you absolutely should not put all your eggs in that basket,” she said. “Life insurance is the best way to make sure someone isn’t left in a financial hot-spot.”