Life insurance can help cover student loan debt, but there are some important details and distinctions to understand.
How It Works:
A life insurance policy pays out a death benefit to your named beneficiary (e.g., spouse, parent, sibling) if you pass away. That money can then be used by the beneficiary to pay off your student loan debt — if they’re responsible for it.
Key Factors to Consider:
- Federal Student Loans (U.S.):
- Discharged upon death — neither you nor your family owes anything if you die.
- So, life insurance isn’t needed to cover federal loans unless a cosigner could somehow be financially impacted (rare).
- Private Student Loans:
- Not always discharged at death.
- Some private lenders do hold cosigners responsible for repayment after death.
- In this case, life insurance can protect the cosigner (often a parent or spouse).
Who Needs Life Insurance to Cover Student Loans?
You might want to consider life insurance if:
- You have private student loans with a cosigner.
- You’re married and your spouse might inherit your debts (depending on your state laws).
- You want to prevent family financial burden in the event of your death.
- You’re planning long-term and want to cover other debts or expenses too.
What Type of Life Insurance?
- Term life insurance is usually sufficient — you can match the term to your loan length (e.g., a 20-year term if your loan payoff is 20 years).
- Choose a death benefit large enough to cover the remaining balance of your student loans and any other obligations.
Example:
If you have $75,000 in private student loans with your parent as a cosigner, and you die unexpectedly, the lender might come after your parent for repayment. A $100,000 term life policy could ensure they’re protected.