The cost of college has been increasing rapidly over the last decade and shows no sign of slowing down. There is currently $1.4 trillion in outstanding student debt, demonstrating just how much the costs of higher education have increased, and how many college students have to resort to borrowing in order to pursue it.
At 93% the vast majority of private student loans have a co-signer, most often the student’s parents, meaning it’s not just the students who are liable for student loan repayments. While it’s an uncomfortable topic, this responsibility makes it advisable for the parents of a child with a student loan to take out life insurance against their child.
Private student loans are notoriously unstable, quite often a contract will contain a clause stating that the loan enters ‘automatic default’ after the death of one of the co-signers. This means that the entire sum of the loan becomes due after the death of either you or your child, a situation that would almost certainly cause financial hardship during an already incredibly difficult time. If your child has a student loan it is worth checking if life insurance is advisable and educating yourself on the best actions going forward. This article outlines some of the most important things to be aware of when taking out life insurance for your child and how to be sure you are getting the best policy for your situation.
Make sure life insurance is necessary
There are two main types of student loan, private and federal. Federal student loans, which are unlikely to require a co-signer, will not require life insurance as these are written off in the case of the borrower passing away. Even if your child has a private loan it is worth checking to see if there is a similar clause written into their loan agreement, as you may not be required to repay it in the case of their death.
“There is one exception to this- the federal parent PLUS loan, which will be void in the instance of either you or your child passing away but is however treated as taxable income. This could make you liable for a large tax payment so it may well be worth taking out insurance in the case too”, – explains Julie Moore, a College adviser at Stateofwriting and Ukwritings.
Ensure the insurance covers in case of ‘Automatic default’
As mentioned above, many private loans include an automatic default clause meaning in the event of the death of a co-signer the entire loan will need to be repaid immediately. If your child’s loan includes such a clause it is important to make sure any insurance you take out accounts for the possibility of automatic default.
Go for term life insurance
There are two types of life insurance, whole and term. Term insurance only covers the individual for a set term before expiring whereas whole insurance does not expire but is significantly more expensive. “Luckily, term life insurance is the most appropriate here as it is only required to cover your child’s student loan for a set period. When taking out your policy do not allow yourself to be pressured or convinced to take out whole life insurance as this will be approximately four times the price and completely unnecessary”, – says Stewart Phillips, a Financial adviser at Boomessays.
Determine the amount of coverage needed
This can be done by looking at the loan’s rate and term, your policy should cover the entire repayment period and not just the time in which your child is in study. It should also cover any interest which the loan will incur and not solely the amount of money borrowed. It is worth calculating both the term of repayment and the amount of expected interest when deciding how much your policy should cover. Typically, private student loans range in term from 5-15 years and annual interest rates range from anything between 3% and 15%.
When buying a life insurance policy for someone else you will need to demonstrate ‘insurable interest’, that is to say that you would suffer financially if the individual passed away. In the case of you being the co-signer of a private student loan you would qualify in this regard.
Preston Briseno, a Financial writer at Essayroo and AcademAdvisor comments:, “It’s important to note that in order to take out life insurance for your child they will have to be involved in the process and consent, which leads to the next point”.
Use the experience to educate your child
While uncomfortable, the process of buying life insurance is the necessary and responsible action to take and can be turned into a key teaching moment for your child as they take on more adult responsibilities. Use the experience to demonstrate the importance of financial contingency plans and discuss important financial skills such as budgeting and maintaining a good credit score.
This may not be a particularly enjoyable moment for you and your child but, by teaching them these vital skills at an early age you are setting them up for a more successful financial life.
In my 20+ years as an independent life and disability insurance broker, I have personally assisted thousands of clients with their life and disability insurance needs. Being independent, I represent many highly-rated insurance companies and, because I am not beholden to any one insurance company, my focus is to find the right company and policy for each individual client. I believe that when people shop for insurance (or anything else, for that matter) on the Internet, they are looking for a simple, non-intrusive, non-pressure method of doing so. I strive to treat my prospective clients with the utmost respect and I believe an educated prospect can make the right decision without sales pressure. Please feel free to contact me at your convenience.
- 6 Tips for Buying Life Insurance for Your College-Aged Child - October 16, 2018