Life insurance may be an uncomfortable subject for you to talk about, but a life policy can allow you to leave a substantial inheritance for your children when you pass away. Your children can use this money in any way they want. They can purchase a home, start their own business, go on a nice vacation, or start a college fund for their children.
Your heirs may also have to use this money to pay off your debts. Some of your debts may not automatically go away when you die. Your heirs may be responsible for paying off any debts you leave behind, and creditors will go to court to make this happen.
When you die, your estate will go through the probate process where the executor of your estate will use your assets to pay off your debts. These debts can include your mortgage, credit cards, car loans, and private student loans. If any assets are left over, then these assets will be distributed to your children and other heirs to your estate.
Will you be responsible for your child’s debts if they pass away? In some cases, the answer is yes. You are responsible for their debts if you are a co-signer on any of their loans. This includes being a co-signer on their private student college loan.
Why should a college student have insurance?
According to the latest statistics from the U.S. Chamber of Commerce, the average student loan debt to obtain a four-year college degree is $37,102. Students who obtain a graduate degree can add $18,210 of student loan debt. The average medical school student loan debt is $194,000, which is on top of the $37,102 average undergraduate student loan debt.
If you are a co-signer on your child’s private student loan, then you should seriously consider getting a life policy on your child. Lenders who provide private student loans will not discharge the loan if your child dies. If your child has a federal student loan, then the loan will be discharged if your child dies.
As a co-signer on your child’s private student loan, you will be responsible for paying off the loan if your child passes away. You probably do not have $37,102 or more that is readily available to pay off the student loan. If you have a life policy on your child, then you can use the proceeds to pay off the student loan. You are not required to be a co-signer if your child gets a federal student loan.
Types of Life Insurance for College Students
Whole life and term life are the two basic types of life policies. A whole life policy is a permanent policy that will last for your child’s entire life as long as the monthly premium is paid. The monthly premium remains the same throughout the life of the policy.
A whole life policy accumulates cash value, which is like a savings account. Your child can take out a loan from the cash value account if they have an emergency. This loan must be paid back, otherwise, they will incur a tax penalty.
If your child dies and you are named as the beneficiary, then you will receive the death benefit proceeds from the policy plus the additional money in the cash value account. For instance, if the death benefit is $50,000 and the cash value amount is $2,000, then you will receive $52,000. The cash value account makes a whole life policy more expensive than a term policy.
A term policy only lasts for a specified amount of time such as 5, 10, or 20 years. The monthly premium remains the same during the term. You can discontinue the policy, renew the policy or convert the term policy to a whole life policy at the end of the term. The monthly premium will increase if the term policy is renewed.
Term policies do not have a cash value account. This makes the monthly premium on a term policy a lot less expensive than the monthly premium for a whole life policy. A college student can have a whole life or a term life policy, but it is probably more beneficial to you if they have a term policy from a financial perspective.
Tips for Choosing Life Insurance for College Students
There is no question that you should get a life policy for your child if you are a co-signer on their private student loan. Here are a few tips you should consider before you get a life policy.
Purchase a Term Policy
A whole life policy is approximately four times more expensive than a term life policy. This means you can provide more coverage for your child’s student loan debt at an affordable price.
Determine the Coverage Amount
A private student loan is like a standard mortgage. It has a fixed term and interest rate, and the payback amount will be higher than the amount borrowed. The interest rate on a private student loan can be between three and five percent.
The face amount of the term life policy should reflect the student loan amount plus interest. You should talk to an insurance broker at WRS Insurance Solutions who can help you determine the right amount of coverage.
Before purchasing a term life policy for your child, you will need to prove to the insurance company that you will suffer financial hardship if your child dies. This is known as having an insurable interest.
Having an insurable interest is easy to prove when you are a co-signer on a private student loan. Your child must also consent to the application process and sign the term life policy documents.
Normally, you would purchase life insurance to provide financial protection for your family when you pass away. When you purchase a life policy for your child who has taken out a private student loan, you are financially protecting yourself for being a co-signer on the loan.
Be sure to read the fine print on the loan and the term life policy. If your child dies, the lender will require you to immediately pay off the loan. You want to make sure that you will have instant access to the insurance death benefit proceeds if this unfortunate event were to happen.
Get started on setting up a life insurance policy for your college student today. WRS Insurance is here to help.