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If you cosign a student loan, you could be liable for payments even if the student is no longer alive.
If you cosign student loans with your child or another loved one, you are accepting equal responsibility to pay off that loan. While most people go into a cosigner relationship with the best of intentions, things don't always go as planned.
While a student dying is already a worst-case scenario, leaving behind big student loan balances can make things even worse. Life insurance is a strategy to protect yourself from shouldering massive student loan debt in this terrible circumstance.
Not all student loan debt dies with the borrower
"I have always shared with clients that there are differences between federal student loans and private student loans," said Michael Anderson, a financial adviser at Maranatha Financial and host of the radio program "Big Money in the 805."
"Federal loans are typically discharged if the borrower dies," Anderson explained. "But that is not the case with all student loans. You may be required to pay back loans of deceased borrowers if you are a co-signer on the loan."
If you are cosigning a loan, it's important to review the fine print and understand what happens in varying scenarios. Once you sign, you are liable for the debt and it is reported on your credit report and credit score. Only cosign if you are willing to accept that burden.
Life insurance protects cosigners if the student dies
Because of the major liabilities involved, few people are willing to cosign student loans outside of a parent or a spouse. This type of connection is usually lifelong and already intertwines your finances. But what happens if the student dies?
In most cases, the cosigner has to pay back any outstanding loan balances. If they don't have enough cash lying around, that may not be an easy thing to do. Life insurance on the student could protect you against this unlikely situation.
"A simple 10-year term policy with limited underwriting could be purchased discreetly and for a very reasonable price," according to Anderson. He shared that a 10-year, $100,000 term policy for a 20-year-old could cost as little as $8 to $12 per month.
Getting life insurance at a young age is a good idea in any case
The cost of life insurance tends to go up with age. Because the monthly cost of term life insurance is locked in when the policy starts, a young person could save a lot by getting life insurance during college. While a family and kids may seem a long way off, getting long-term, high-value life insurance early is often a wise decision.
Every family should look a the numbers and compare before signing up for life insurance, but getting a policy for your child in college could be a great gift for them and a prudent protection for your finances.
Life insurance is for the things you can't predict. While it's unlikely someone in their early 20s will die, accidents and illnesses happen.
Hopefully, you never need it. But in the rare case someone finds themselves paying for the student loans of a deceased student, the opportunity to get life insurance has already passed. If you are cosigning a student loan, think ahead about protecting your money and credit from problems with the loan.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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