In the last few decades, college fees are rising rapidly without any sign of decreasing any time soon. The $1.4 billion of outstanding student debt clearly shows that higher education is expensive, and college students need loans to pursue it.
Usually, private student debts have parents as co-signer of the loan. This means that parents are also liable for the loan repayments. Some people might be uncomfortable discussing this topic, yet it is crucial for parents who have student debt to consider purchasing their child’s life insurance policy.
The student loans are volatile; one of the clauses of the student loan contract states that if any one of the co-signer dies, the loan will enter “automatic default,” which means the loan’s whole amount becomes due immediately after the death of any co-signers. Indeed, financial difficulty during an already challenging time. Thus, if your child has a student loan, you might want to check if life insurance would support it.
The article provides a few tips for buying the right life insurance policy for your child. Having a student loan and things to be aware of when you purchase life insurance for your college-going child.
1. Be Certain Life Insurance Is Necessary.
Student loans are of two types, federal and private. For a federal student loan, you don’t need a life insurance policy as it doesn’t require a co-signer, and the loan writes off if the borrower dies. But if your child has a private student loan, you must check for a similar clause in the agreement, stating that you don’t need to repay the loan if the student dies. Private student loans have a clause that requires a co-signer which means the whole amount is due if any co-signer dies.
2. Make Sure Insurance Covers in Case of ‘Automatic Default.’
As discussed above, most private loans comprise a clause on automatic, which means if one of the co-signer dies, the entire amount of the loan needs to be repaid immediately. Hence, if your child’s student loan has such a clause, it is crucial to purchase an insurance policy covering the possibility of automatic default.
3. Select the Term Life Insurance
Life insurance has two types, whole and term. Term insurance provides coverage to the individual only for a specific period before it expires, whereas whole insurance doesn’t expire but is more expensive.
For student loan coverage, term insurance is the best option, as it requires coverage for a specific period. Remember, don’t let yourself be convinced to purchase whole life insurance as it is four times more expensive than term insurance and en4tirely unnecessary.
4. Decide the Amount of Coverage Needed.
Consider looking at the rates and terms of the loan. The policy must cover the whole period of loan repayment, not just your child’s study period. Furthermore, it should include the interest incurred on loan and the principal amount of the loan. It is crucial to calculate the repayment terms and the expected interest amount when determining how much coverage you require. Mostly, the private student loan has a life of 5-15 years with an annual rate ranging between 3-15%.
5. Determine Insurable Interest
When you buy a life insurance policy for someone other than yourself, you need to decide the ‘insurable interest,’ which states that you will face financial constraints if the policyholder dies. In case you are a co-signer of a private student loan, you might succeed in this matter. Hence, your child must get involved in purchasing the life insurance policy and have their consent in buying it.
6. Educate Your Child Using the Experience
Although we agree that talks about life insurance get uncomfortable, yet it is a necessary action. It might also serve as the opportunity to teach your child about the importance of financial contingency plans and discussing the financial skills necessary, such as budgeting and retaining a good credit score. It will help your child to have a successful financial life.