Life insurance is a financial product that people usually consider getting when they have dependents, such as spouses or children, who rely on them for their income and financial security. People also consider purchasing life insurance when they decide to undertake joint debt with their spouse or partner, such as a home loan, and where the death of one spouse would cause a burden on the other spouse with respect to the joint debt.
Do you often wonder if your spouse might have to shoulder the responsibility of your unpaid student loans in the case of an unexpected death? Many borrowers with cosigned loans worry about burdening their parents with their unpaid student loans in the event of unforeseen circumstances.
So, should you consider purchasing a life insurance policy to cover your student loan debt? This article will walk you through the specifics of student loan life insurance to help you decide whether this is the right choice for you or not.
Here’s everything you need to know.
Do I need student loan insurance to cover my student loans?
The answer depends on whether or not your student loans are federal or private.
Federal student loans
If you have federal student debt, rest assured that all your debt will be discharged in the event of an unexpected death. Parent PLUS loans are also dissolved at the death of the parents or the student. So, if all your student loans are federal, you don’t need to purchase life insurance coverage for your student loans.
Private student loans
When it comes to private student loans, the situation gets a bit complicated. There are multiple private student loan products and loan providers who offer death benefits. However, that does not hold true for all lenders, so you need to figure out the terms of your student loans.
If a private student loan has been taken out under your name, your family members will not be responsible for repaying the debt in the event of your death. However, private lenders will make a claim against your estate and assets in efforts to settle their debt, assuming the amount isn’t cancelled upon death.
Therefore, if someone will be depending on receiving your assets, an insurance policy that pays off your student debt may make sense, particularly given the low cost of term life insurance.
Co-signed private student loans
In the case of cosigned private student debt, it is even more important that you figure out what happens upon either the death of yourself or your cosigner. If your co-signed private student loan doesn’t come with death forgiveness, either you or your cosigner will take over the primary responsibility of the debt upon the death of the other.
A lot of student borrowers use their parents as co-signers on their student debt. If you get hit by a bus, do you want them to be grieving for you and stuck with paying off your student loan debt?
A cheap term life insurance policy can remove this risk for less than $50 a month.
Life insurance for high-net worth individuals with student loans
Suppose you’re a lawyer, medical professional, engineer, or have another high-paying profession. In that case, you probably have a lot of debt. If you have huge student debt and if someone else ends up being responsible for your debt, it’s going to be a huge burden on them.
So, how much life insurance do you need as a high net worth borrower?
When it comes to life insurance policies, the general rule of thumb is choosing a policy that is at least ten times greater than your yearly income, assuming you have dependents that are relying on your income.
If you’re single and the only problem is that your parents might have to pay back your student loans, then all you need is a policy in the amount of your student loan debt. A term life insurance policy for $200,000 can be found for ~$25/month.
How to ladder life insurance policies
One way to keep the cost down on life insurance policies is to ladder the policies.
It’s pretty simple.
Let’s say you need $2 million worth of term life insurance. Instead of buying one policy, you can purchase two life insurance policies worth $1 million each. The first policy might have a term of 15 years and the second policy might have a term of 30 years.
With two policies, you now have $2 million of coverage for the next 15 years and $1 million of coverage for the last 15 years, presumably because during the first 15 years you built up at least $1 million of assets.
You can use the same strategy for student loan life insurance. You only need a policy of 10 years or less because you’ll pay off your student loans within 10 years, right? You can also cancel the policy as soon as you’ve paid off your student loans.
Laddering policies is cheaper because you’re only buying coverage for the time you need and not unnecessary coverage when you don’t need it.
After plugging the numbers on Policygenius, the insurance quotes for a healthy 30-year-old male were:
- $1 million policy (15-year term) = $23 per month
- $1 million policy (30-year term) = $52 per month
- $2 million policy (30-year term) = $99 per month
As you can see, laddering the policies saves you $24/month because you’re decreasing coverage appropriately after 15 years.
Student loan life insurance companies
All you’re looking for is term life insurance. Stay away from the complicated life insurance products that mix investing and insurance (e.g. whole life). Term life insurance is cheap and a commodity product, so just about any life insurance company should work for you.
To make your search easier though, you may want to start with a digital company that uses technology to pull quotes from a bunch of different lenders realtime.
PolicyGenius is a great place to shop for life insurance. They compare rates from dozens of insurance companies at one time and it can take less than five minutes to see actual quotes. While they make a commission on each insurance policy sold, PolicyGenius does not pay its life insurance agents on a commission basis, so they are not incentivized to sell you more (or additional) policies that you don’t need.
If you have any health issues, you may be better off to work with an insurance agent. Insurance agents know the various health requirements of different insurance companies and can help you find the right company that will penalize you the least for any health concerns.
Insurance agents are paid a commission by the insurance company, so you won’t have to pay anything out-of-pocket to work with them. We maintain a list of recommended insurance agents that have worked with our community for years.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He is always negotiating better student loan refinancing bonuses for readers of the site or finding honest companies that provide student loan advice for a fair price.