When It Makes Sense to Have Student Loan Insurance

Life insurance is something that people generally don’t consider getting until they have a spouse or kids who depend on their income. Another reason individuals may decide to get life insurance is when they have joint debt, like a mortgage or car loan, with their spouse.

Many borrowers may also wonder if their spouse might be responsible for unpaid student debt in the event of an unexpected death. Or for those with cosigned loans, whether their parents would be on the hook for their student loans.

Here’s a look at repayment rules and whether you should consider student loan insurance in the form of life insurance coverage when you have high student debt.

Do you need student loan insurance?

The answer to that question depends a lot on whether or not your student loans are federal or private. Let’s take a look at both scenarios.

Federal student loans

If your student loans are all federal and come from the Department of Education, you’ll be happy to learn that all federal students loans are discharged at death. Parent PLUS Loans are discharged upon the death of the student or the parents. So this is great financial protection for college students and borrowers, so your loved ones won't have to take over your monthly payment.

Private student loans

Unfortunately, if you have private student loans from pursuing higher education, the waters are murkier. Some of Student Loan Planner®’s favorite private lenders offer a death benefit, but many do not.

If your private student loans were taken out in your own name, then your family members should be shielded from any repayment responsibility. However, lenders could potentially try to come after your estate.

You may want to consider getting a life insurance policy that covers your student loans after your death, particularly if you have a home or other large assets in your estate.

Cosigned private student loans

If you have cosigned private student loans that don’t offer death forgiveness, your cosigner would become responsible for your student debt upon your death.

For a large majority of borrowers, their parents are the cosigners on their student loans. For this reason, many parents decide to put a term life insurance policy on their children to protect themselves against the risk.

If you don’t want your parents to have to pay life insurance premiums on your behalf, you can take out a term life insurance policy (as opposed to whole-life insurance) in your own name. This may be your best option for protecting your parents if you’re unable to secure a cosigner release on your student loans.

What about high-net worth life insurance?

People who work in fields that are generally high-paying, like lawyers and medical professionals, often face an unusual situation. They have a generous income and may even own significant assets while also having huge student loan balances.

In this case, the thought of lenders coming after your estate to recover outstanding balances is an even bigger concern.

How much life insurance do high-net worth student loan borrowers need?

The general rule of thumb with term life insurance is to aim for a policy that’s worth at least 10 times your annual income.

However, if you have a high net worth and massive student loan debt, you may want to increase that amount. You’ll want to take out a life insurance policy large enough to pay off your student loans in a lump sum, in addition to replacing ten years of income for your survivors.

Life insurance for doctors with big student loans

Life insurance for doctors can be especially tricky. On the one hand, you should make a ton of money throughout your life. On the other hand, you'll likely graduate medical school with huge amounts of debt.

Residency can be especially tough. Because you’re in school for twice as long as the average college graduate, doctors in residency are often already married with kids. And policies will be cheaper when they start residency than they will be three to five years after they graduate.

Yet, doctors also receive low pay in residency. They may not have the income to afford the premiums for the amount of life insurance they expect they’ll need just a few years after graduating from residency.

Laddering life insurance policies

Although getting the appropriate amount of life insurance for physicians in residency can be difficult, one cost-cutting option is to ladder policies.

For example, if you anticipate you’ll eventually want around $2 million in student loan insurance coverage, you could buy two life insurance policies: a $1 million, 15-year policy and a $1 million, 30-year policy.

You may be surprised to learn this is cheaper than buying one $2 million policy with a 30-year term. After plugging in the numbers into an online life insurance quote tool, the insurance quotes for each policy were:

• $1 million policy (15-year term) = $23 per month
• $1 million policy (30-year term) = $54 per month

The total was $77 per month using the laddering strategy. By comparison, a $2 million policy with a 30-year term would cost $104 per month — $27 more per month.

This laddering technique can save you even more as you start looking at larger policy totals. For instance, a $6 million policy would cost $302 monthly. However, buying three $2 million policies with 10-, 20- and 30-year terms would be far more affordable.

Check out how the math played out below:

• $2 million policy (10-year term): $33 per month
• $2 million policy (20-year term): $45 per month
• $2 million policy (30-year term): $79 per month

That’s a total monthly cost of $157, resulting in $145 per month in savings.

This strategy also allows you to step-down how much you’re insured every 10 years as your net worth hopefully rises.

Student loan life insurance companies

When it comes to making sure you have enough life insurance, student loans can make things more confusing. You can get personalized recommendations that are specific to your professional and financial situation from SLP Insurance. Get a free life insurance quote for your specific situation using the SLP Insurance quote tool below.