Buying student life insurance may seem unusual. After all, most students don’t have dependents who depend on their income. But if your adult child has student loan debt, college life insurance might make sense. In fact, any financial responsibility you have taken on together with your student could leave you with financial fallout if something happened to your child.
Understanding when student life insurance can be of benefit could help you decide whether you should get a quote for your child. Bankrate is here to help you decide if life insurance is right for your student, what type of policy and coverage you might want to purchase, and how to start choosing a policy.
Why would you want to buy life insurance for your student?
If you share financial responsibility with your college-age child for certain debts, you may be responsible for the remaining balance if your child were to die. Student loans can help your child get an education, and the hope is that when your child graduates they will earn enough to pay off the debt on their own. But in the unfortunate event that your child dies prematurely, you might want financial protection. You may want to consider student life insurance if you share any of the following debts with your child:
- Co-signing of mortgages: If you co-sign a mortgage with your child and your child dies and is therefore unable to make the payments, the lender can sue you. It could be difficult for you financially if your child died without any assets.
- Auto loan co-signature: As with a mortgage loan, if your child dies and they cannot pay off their car loan, you may have to pay or repossess the vehicle.
- Joint credit card holders: If you co-signed a credit card for your student, you are just as responsible for the debt as they are. This shouldn’t be a problem if your child is meeting the monthly payments, but if they have a balance when they die, a life insurance policy could protect you against that debt.
- Student debt: Americans have more student loan debt than credit card debt. $ 1.7 trillion of student debt out of a total of 42.9 million borrowers means an average balance of about $ 39,797 per student loan borrower in private and federal student loan debt. While parents cannot co-sign most federal student loans and are not required to repay them if their child is successful, private student loans are another matter. Many private lenders require a co-signer and approximately 93% of private student loans are co-signed. The co-signer is responsible for paying off the debt in the event of the borrower’s death, sometimes even all at once.
What types of student loans could make life insurance useful?
The US Department of Education issues and guarantees federal student loans, which are canceled after the death of the borrower. If your child only has federal student loans, you may not need to contact a life insurance company for a quote, at least not because of student loan debt. The same is true if you have taken out a federal Direct PLUS parent loan. If you take out a parent PLUS loan on behalf of your child and he or she dies, the debt will be paid. And if you die while the loan is in progress, the loan will also be discharged. You will just need to provide proof of death to the loan manager.
In the years prior to 2017, this discharged student loan debt would be considered taxable. But the Tax Cuts and Jobs Act 2017 provides for the exclusion of debts paid due to the death of the student or the borrower until 2025. This rule can be extended. From now on, the IRS specifies that this scenario will not result in a tax bill for the parents.
But the share of students taking out private student loans has increased every year since 2012 as college costs increase. Students often need to borrow from a private lender to finance their education, and most private lenders need a co-signer. These non-federal student loans, which are issued by banks, credit unions, and online lenders, are unsecured and the lender is not obligated to pay off the debt upon the death of the student.
In fact, some private student loans have provisions in the contract that can result in automatic default if one of the co-signers dies. This means that if you or your child die with an outstanding private student loan, the lender can try to recover the entire balance from the surviving co-signer in one go.
The last thing your student should worry about is that their loan balance becomes due upon the death of a parent or loved one who co-signed for them. Therefore, you may want to purchase a life insurance policy for yourself if you have co-signed a private student loan for your child. In short, if private student loans are included in the equation, it might be a good idea to purchase life insurance for you and your child.
What type of life insurance is recommended for students?
While a whole life insurance policy creates cash value and can be a great estate planning tool, it can also cost more than other types of life insurance coverage. Additionally, many states limit whole life coverage to people 45 years of age or older. If you want to explore other options, a term life insurance policy might be a good choice, and students might get low rates due to their age. A term life insurance policy covers the insured for a specified period, typically 10 to 30 years. If the insured dies during the term of the policy, the beneficiaries receive compensation. The policy expires at the end of the term, unless you choose to renew it or convert it to a permanent policy.
Term life insurance could allow you to purchase a policy to cover your student while they are still paying off their private student loans or other debts. Once the debt is paid off, the risk of you having to make the monthly payments goes away, so you may no longer need a policy. The cost of term life insurance is generally very affordable. Some insurers may even allow you to add a child rider to your own policy that will cover your student. The limits for children’s riders are usually lower than what you might get with a separate policy, but if your child doesn’t have a lot of debt, this might be a good option.
How to buy life insurance for your student?
To purchase a policy on behalf of your student, you will first need their authorization. You will also need to prove insurable interest, which means you would suffer financial loss if your child died. Your co-signed loan documents should suffice as proof of insurable interest. Here is the procedure for purchasing life insurance for your child:
- Calculate what coverage you need. You can choose to be based on how much debt your child owes and the estimated number of years it will take to pay it off.
- Consider adding a child rider to your policy. If you want to add a children’s rider to your own life insurance policy and your current life insurance company doesn’t offer one for students, consider switching life insurance providers.
- Compare quotes from different insurers. You might want to start with the biggest life insurance companies, or you might want to try one of the new fintech startups that offers an online-only process. Get a handful of quotes to find the lowest fare for your child.
- Complete the request. You will likely need to sit down with your child to do this, as you will need specific information about their condition.
- Schedule a medical examination. This step may not always be necessary; some companies offer policies without review. But if you need to schedule an exam, be sure to ask the agent or insurance company how to do it. Some companies have specific providers that they use, and the carrier can even arrange for a nurse to come to your home.
- Sign the policy. Once the policy is approved, you will need to sign and make the first payment.
- Pay the premium. Most companies have monthly payment plans for life insurance, and you may want to consider purchasing automatic payments. You may also be able to pay the premium quarterly, semi-annually, or annually. If you don’t pay the premium on time, the policy will expire and coverage will end.
Frequently Asked Questions
Should students purchase their own life insurance?
If you want your student to learn about insurance and financial responsibility, have them take out their own policy and point you (or the co-signer of their debts, if not you) as the beneficiary could be. a great learning experience. However, if your child has their own life insurance policy, they will be responsible for paying the premium to keep the policy active. If you’d rather make sure the policy doesn’t expire so that you have the protection you need as a co-signer, you may want to purchase the policy yourself.
Can a child rider be converted to a whole life policy at a later date?
Potentially. Many life insurance providers allow you to convert a child rider into a whole life insurance policy for your child at the age of maturity (when the rider is due to expire). Sometimes the insurer will limit the face value of that whole life insurance policy based on the coverage you had for the rider. For example, you might have $ 10,000 in coverage through a children’s rider, and your insurance company may only allow you to convert to a whole life policy for up to five times that value. If this coverage isn’t enough for your child as they get older, you may want to purchase a separate policy for your child upfront.
What insurance do I need to take out for my student?
Life insurance is optional but important if you share debt with your child. Other types of insurance are also important. Auto insurance is required in almost all states; if your child drives, they must be listed on your policy or have their own policy, depending on the owner of their vehicle. Renters insurance is also a key part of your child’s financial well-being in college. A tenants’ policy covers your child’s belongings in their apartment or rented house while in school and also provides liability coverage in the event someone is injured or your child damages someone else’s property.