It’s a situation that no parent wants to think about — the prospect of outliving your child. Having to bury the child you raised is an unspeakable tragedy. But if you were a student loan cosigner for your child’s private loans, you may be in for more trouble than just heartache.
As a co-signer, in most cases, you are legally and financially responsible for repaying the debt should the borrower pass. You may be able to work something out with the lender, but private student loan lenders are much less flexible than their federal loan counterparts and you could be on the hook for the remaining balance.
Dealing with such a tragedy already comes with a high emotional cost, but suddenly you could be dealing with a high financial cost as well. So what can co-signers do to protect themselves financially? Get life insurance.
A life insurance policy can help lessen the financial burden of dealing with a child’s death and can also help repay any outstanding debt. If you’re a private student loan co-signer, find out how a life insurance policy can protect you and your finances.
What is a life insurance policy?
A life insurance policy is a way to provide financial security for yourself and your loved ones in the future. Let’s face it, death can be expensive with funeral costs, loss of income, and possibly remaining debt.
The point of a life insurance policy is to protect your finances from the sudden loss of income or increased financial responsibility. Through a life insurance policy, the beneficiary of the plan will receive funds related to the policy when the insured person passes. These funds can help cover costs associated with the passing.
It’s important to note there are various types of life insurance, which vary widely in purpose and benefits. In the next section, we’ll discuss what type of life insurance is best for student loan co-signers.
How life insurance can protect a student loan co-signer
Not all student loans are created equal. Federal student loans do not require any co-signers. They also include a death discharge, which cancels any remaining debt should the borrower pass.
Private student loans are a whole different ballgame. Many private student loans require a co-signer; according to the Consumer Financial Protection Bureau, nearly 90 percent of private student loans in 2011 had a student loan co-signer.
As a parent, you want to help your kids have access to whatever they need to attend college, which could mean co-signing student loans. Unfortunately, there’s little benefit for co-signers and could lead to trouble down the line.
If you co-signed a student loan for your child, a life insurance policy on your child can ensure that you can handle any financial hurdles should your child pass.
“If the unthinkable were to happen, a life insurance policy would be able to take care of the financial worries so the family can focus on grieving and other more important issues surrounding such a tragedy,” said Ross Quade, CEO at TermlLifeInsurance.com.
If you are suddenly responsible for a $100,000 private student loan and have to take over payments, you could find yourself struggling to make payments and keep up with saving for retirement and managing your own financial responsibilities.
You will want to get a life insurance policy that will cover the costs of a funeral as well as the private student loan debt. So if your child is taking out $100,000 in private student loans, you should get a policy that covers all of that and more.
In order to determine your life insurance needs, you can calculate how much you need.
“A parent that co-signs on a child’s private student loan should consider term life insurance policies,” said Quade. According to Quade, a term life insurance policy is a good idea for the following reasons:
- They can choose to have the policy in place for a specific amount of time — the life of the student loan.
- They are generally the most affordable, especially if the insured is young and healthy.
- A term life insurance policy will have a death benefit to cover funeral costs (which average around $10,000); a cash value that can be used to pay off the student loan; and can secure future insurability as the beneficiary ages.
Using term life insurance, you could get a policy that could easily cover the cost of private student loans for a period of 10 to 30 years.
Life insurance for younger folks is inexpensive as well. Depending on lifestyle, age, as well as other factors, you could get term life insurance for $15 to $30 per month or less. You may be able to get a discount if you pay in full annually.
What to do before buying a life insurance policy
A life insurance policy can be a good idea for student loan co-signers in order to protect their finances. But before shelling out any money on a policy, become an empowered consumer first.
First, check in with your private student loan lender and see if they have an official death discharge policy. If they don’t have a formal policy in place, getting life insurance may be a safe bet. If they do have one, a life insurance policy may not be a necessity.
Secondly, determine how much life insurance you need. What will cover the costs of the loans, funeral costs, and more? Next, research various places to get life insurance and weigh the prices and the coverage.
“Be sure to shop around and speak to an agent about your specific needs,” advised Quade. “Buying term is by far the cheapest option to consider [but] be careful not to fall into a life insurance salesman trap. Always remember that you should never buy more than you can afford.”
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