You may think that life insurance is for older people, those that are married with kids or that have mortgages and serious assets. For the most part, this is correct. Most jobs with benefits come with a modest amount of life insurance at little or no cost that’s enough to cover funeral costs. For most recent graduates that are young and have no other responsibilities, this may be enough even if you’ve got federal student loans.
Federal student loans come with a provision that allows your survivors to file for a death discharge that will release the borrower’s estate from the liability. But if you have private student loans, it’s another matter entirely. Here’s what you need to know now before anything happens:
#1 Does your lender offer death discharge?
Some private student loan lenders offer death discharge. You should read the fine print on your loan documents to see what happens if either you or your cosigner pass away before the loans are paid off. If your lender does offer death discharge, it’s no big deal and you likely have little to worry about. If they don’t, you may want to purchase life insurance to cover the payoff amount of your loan so you don’t leave you cosigner or family holding the bag. Sallie Mae offers this, other lenders may as well.
#2 Do you have a cosigner on your student loan?
If you have private student loans that are cosigned, both you and your cosigner are at risk if something happens to either of you before the loan(s) are paid off. If something happens to you, your cosigner will be 100% responsible for the debt and if your cosigner passes, your debt could be called in, even if you’re paying promptly. In this case, it’s wise to have life insurance on both you and your cosigner to protect both if you in case the unthinkable occurs.
#3 Are you married?
If you don’t have a cosigner, but are married, your spouse may be held liable even if they weren’t a cosigner. It depends on what assets you own together that are part of your estate, whether you live in a community property state, whether the loans were taken out before or during the marriage and a host of other factors. The bottom line is that if you’re married and there’s no death discharge on your private loans, life insurance protects your spouse.
#4 Do you have assets to protect?
Another consideration with private student loans is, if you do pass away, what will your estate amount to? Creditors can apply to your estate for payment, but if you don’t have any assets, you may not have much of an estate. If you don’t have a cosigner or spouse to protect and any estate will go to your parents or someone else, it may not be a big deal. If you do have significant assets you want to protect or want to be able to leave something behind, insurance is smart.
What type of insurance do you need?
There are many different types of life insurance – the most common are whole life, universal and term life. Whole life lasts for the rest of your life, is costly and not a fit for this situation. Term life is likely your best option. You can set the term of the coverage to match the term of your private student loans. For instance, if you have 10 years left on your loans, an 8-10 year term life policy should do you fine. If you owe $50,000 in loans, you can purchase a policy in that amount or a little less. Play around with premiums to see what’s affordable and be sure to consult with a professional insurance broker to get the best results.
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