If you're young and healthy and don't have any dependents, you may assume life insurance is unnecessary. However, if you also have private student loans, you may want to buy life insurance to repay that debt if you die prematurely. The loan may have to be repaid, depending on the lender and whether you have a co-signer.
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Deanne Loonin, an attorney with the National Consumer Law Center and director of its Student Loan Borrower Assistance Project in Boston, says federal student loans allow a "death discharge." That means the borrower's survivors can complete paperwork releasing them and the estate from any responsibility for the debt.
But private student loans may be a different story.
"Some private student loan lenders will do a death discharge, but generally private student loans are treated like any other type of debt that must be repaid by the borrower's estate," Loonin says.
A Co-Signer Needs Some Consideration
The bigger issue with private student loans, says Loonin, is that a majority of them require a co-signer. Federal loans do not require a co-signer.
"While state laws on this subject vary, a co-signer is usually equally responsible for a debt," notes Loonin.
"You should read the private loan agreement to see what happens in the event of a borrower's death," she adds. "In most cases, the debt won't be accelerated, so the co-signer might need to take over the payments rather than immediately pay off the loan in full. However, in some cases, a death could trigger a default, and the lender could demand an immediate repayment."
Ronya Corey, a senior vice president with Merrill Lynch Wealth Management in Washington, D.C., suggests that borrowers and co-signers delve into the details of their student loans so they know the potential consequences of a borrower's death.
"You need to know what the co-signer's responsibility is," says Corey. "Then you need to look at the co-signer's total financial picture to see whether they have the cash flow or assets to handle the loan. You should look at the worst-case scenario in the context of your overall financial plan and your retirement funding."
If you have student loans and are married, it is possible the debt could impact your spouse if you die before the loans are repaid, says James Ian, a financial planner with the Barnum Financial Group, a MetLife office in Guilford, Conn.
"In the event of a death, anything held jointly has exposure to a lending institution," says Ian.
Loonin says lenders will first contact the co-signer for repayment. If your loan has not been co-signed and you are married, your spouse could be expected to repay the loan from joint accounts, although this varies based on state law and lenders' policies.
Life Insurance can Protect Co-Signer, Spouse
One way you can protect your co-signer and/or your spouse is to purchase life insurance to cover the amount of your student loan debt.
"If you are under age 40 and need less than $500,000 in life insurance, you can easily apply online for basic term life insurance," says Ian. "Term life insurance is the most cost-effective way to get temporary life insurance for 10, 20 or 30 years."
At MetLife, for example, a person with student loans who's younger than 40 and doesn't smoke could buy a $100,000, 10-year term life insurance policy for a little more than $10 per month. A smoker would pay about $20 per month. No medical test is required for this type of term life insurance.
"It is best if you can name the person who will be responsible for your student loan debt as the beneficiary because then that individual will be paid outright by the insurance company if you pass away," Ian says. "You can always change the beneficiary at any time, so if you initially have your parents as the co-signer and later want to protect your spouse, you can just change the name of the beneficiary."
"There's no 'yes' or 'no' answer on life insurance in the case of student loan repayment because it depends on each individual's circumstances," says Corey.
If you have student loans from a private lender, you should review your loan papers to determine the consequences for your family if you die before the debt has been repaid. A small life insurance premium may be worth the extra peace of mind for your co-signer or spouse.