College students are young, active, and usually in excellent health--few would think of them as good candidates for life insurance. But tragedy can strike at any time: a student can get sick or have a serious accident and, sadly, lose his or her life at a young age. In this case, in addition to the hardship of losing a young member of their family, the deceased's relatives will be faced with an enormous problem: paying student loans.
Life insurance can help the student protect their family and free them from this heavy burden. Additionally, it can also be a savings tool to help them pay off these debts themselves, even if nothing terrible happens. In this article, you will find out why purchasing life insurance should be a priority for college students.
Life Insurance for Students: Article Contents
What Is Life Insurance for Students?
No parent wants to even consider the possibility of losing a child. But tragedies can happen to anyone when they least expect them. Along with losing a college-aged child, parents might have to bear another difficult burden: paying loans taken out to pay for high college tuition expenses. The best way to avoid this is to take out life insurance for students. This product guarantees a payout or death benefit to help cover student loans in the event of the insured’s death.
Private college education in the United States is very expensive. It’s not rare for parents to risk all their savings and assets to finance their children’s tuition at great universities. Others taken out loans that can affect their long-term assets.
Many also cosign their children’s student loans, which can be federal or private and must be paid back by the students themselves. In fact, according to statistics from the website Student Loan Hero, over 70% of US college students are estimated to have student loans, with an average of upwards of $36,000. In total, there are approximately 48 million Americans who owe student loans.
And there are even more complicated scenarios to consider. Some adults decide to return to school to better their education after years in the labor market. There are also students who have their own children or other dependents they’re responsible for.
In all these cases, the premise is the same: the student hopes to get a good job that will help them pay back the money as soon as possible. But what happens if the student dies? Who will recover all this spent or borrowed money? Life insurance for students can help resolve some of these uncertainties.
Life insurance is a product that meets a logical need: the insured pays money, and in exchange, the insurer will deliver a payout to the beneficiaries they designated if the insured dies.
There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance is issued for a limited duration: 5, 10, 15, or 20 years. During this time, the insured pays monthly premiums and, if they die, their beneficiaries receive the death benefit. If the insured outlives the term of the policy, it usually expires. But there’s also a way to convert it into permanent insurance, which offers many benefits. There’s also a type of term insurance that returns the premiums if the insured outlives the policy.
Another option is permanent life insurance, which is a more complex product. It is purchased once and accompanies the insured until their death, regardless of how long they live. These insurance policies contain savings components, which generate money to build both the payout and cash value. Cash value is money accumulated by the policy that the insured can use to cover their own expenses or to take out a loan against its future value.
The types of permanent insurance policies with these savings components are, in order of their complexity and demands on the insured, whole life, ordinary or traditional insurance (simple and easy); universal life insurance (allows you to modify premiums and other aspects); variable life insurance (invests the insured’s money in variable income products and requires more control); and variable universal life insurance (combination of the last two).
In general, student life insurance policies do not differ much from those offered to the general public, except in one sense: they are less expensive and much easier to obtain.
They are less expensive because students are generally young and healthy and lead low-risk lives. As such, insurers can offer them policies that are cheaper and easier to pay.
For the same reason, the process to qualify for insurance is simpler. Insurers see less risk in young, healthy people with long life expectancies. In any case, it’s important to be open and honest during the qualification process; don’t lie or conceal any information from the insurer. To do so is a mistake that could later cost you your policy.
In addition to life insurance, students should also purchase extra health insurance, especially if they’re studying away from home.
Types of Life Insurance: Which One Is Best for You?
The first thing to take into account when choosing your insurance is what type of loan you have and the best way to tackle it. In general, federal student loans are cancelled if the student dies. So if you have a federal loan, you might not need to purchase life insurance.
But if the loan is private, as it is in most cases, you be more wary. First, figure out who is required to pay back the debt. If the student and/or their close relatives are required to pay it, it’s best to take precautions and purchase life insurance to cover any future complications. Of course, if a traditional loan, cosigned loan, or home equity loan was used to pay for college, we highly recommend setting up a safety net to protect the family if the student dies and they have to cover these high debts.
Once you’ve determined what type of student loan you have, or why you need a financial guarantee, you need to choose the best insurance policy for you, whether you’re a student or the parent of one.
- Term insurance. The most common type of insurance for this situation is term insurance. This product is designed to be valid for a set period of years; after that, it expires. For this reason, it’s perfect for college. It’s best to take out the policy in the name of the student: since they’re younger, it will be less expensive. But it can also be purchased in the name of one of the parents. Term insurance is also a great option for people who stopped working to go back to school and don’t have unemployment insurance or other assistance; people who are working and studying at the same time; and people in school with dependents, such as children or spouses.
- Advantages of term insurance. There are two main advantages to term insurance: the price and the easy qualification process. These policies are less expensive because they are offered for a limited duration; insurers take on less risk and can reduce the price of premiums. At the same time, also because of the lower risk, the requirements for purchasing term insurance are much less strict. Insurers demand less information, rarely request medical exams and reports, and simplify the qualification process. This means term insurance can be purchased quickly and enjoyed almost immediately.
- Disadvantages of term insurance. There’s one major downside to term insurance: no payout. Once the policy ends, if the insured is alive, the relationship between the client and the insurer simply dissolves. No death benefits are delivered and the beneficiaries will not receive anything. Only with return of premium term insurance is the money paid in premiums returned if the insured outlives the policy. To avoid this problem with the payout, the best option is to transform the term policy into a permanent one. We recommend transforming it before the policy expires. In converting to permanent insurance, the policy will remain in effect until the death of the insured. It costs a bit more, but you won’t need to go through the complicated permanent insurance qualification process.
- Whole life permanent insurance. Of the various types of permanent insurance we’ve seen, whole life is the most advisable for students. This simple option generates reliable savings and barely requires any attention from the insured. If taken out in the name of the student, the insurance will accompany them for their entire life. It will be a safe and stable product that will provide long-term profits in the form of savings and will leave a significant payout to any beneficiaries.
- Advantages of whole life permanent insurance: In addition to being a relatively simple and easy product for the insured, whole life has one major benefit compared to term insurance: the payout is guaranteed, as long as the policy payments are up-to-date. What’s more, the savings component earns something called cash value, an amount of money that is given to the insured after reaching a certain limit, with deferred taxes. In other words, it generates money that can be used as savings.
- Disadvantages of whole life permanent insurance: Like all permanent insurance, whole life has two important disadvantages: the price and the qualification process. The price is higher than term insurance, because the risk the insurer takes on is certain and greater.
And qualification is usually complex. It’s a long process during which the insurer requests information about the insurance applicant’s health and finances. It typically includes medical exams. We recommend being open and honest and not hiding any information from insurers so as to avoid any problems in the long term. For students, who are generally young, healthy, and lead active lifestyles, it’s easier to get past this process, which is why we recommend getting insurance in their name.
- Other permanent insurance. The other types of permanent insurance--universal, variable, and variable universal--are less suitable for students. Not because they’re not useful, but because they require more attention and management from the insured, and students should be focusing on school, not on their insurance. That being said, those who have time to dedicate to insurance, or who have family members or others who can do it for them, can choose these products, which are more sophisticated and demanding but also potentially more profitable with the right investments and management.
In any case, whichever insurance you choose for a student, don’t forget the most important step: choosing the right beneficiaries. These policies have a basic goal, that of covering college costs if the insured dies. As such, the beneficiaries should always be the people who would be responsible for these debts.
In general, these are the parents, who use their assets to help their children take out student loans. But it can also be a spouse or other close family members.
Once a student graduates college and the financial risk is lower, the insured can decide to add any other beneficiaries. For permanent insurance, which is expected to last a long time, it’s important to be mindful of any necessary changes to the beneficiaries. If not, the beneficiaries may have already died when it comes time for them to collect the death benefit.
Life Insurance as Savings: Paying for Tuition
One important factor in selecting life insurance for a student is the savings permanent insurance can generate. You can use this money to pay your student loans.
For example, you can use whole life insurance to apply for a loan against its future cash value. You can put this money toward your student loan and later replace the cash value you borrowed, little by little.
With a little more risk and effort, products like variable permanent life insurance can generate greater returns and contribute more efficiently to alleviating the costs of higher education.
Even so, it's important to keep in mind that paying all or part of your student loans is just an advantage of having this kind of policy. Don’t lose sight of the real purpose of life insurance for students: protecting their families’ financial situation in the event of their death.
With that in mind, it’s important to carefully explain the purpose of life insurance to students. They must understand that purchasing life insurance for them doesn’t mean their families love them less or consider them a financial burden. If misunderstood, life insurance can make the insured student feel disheartened or concerned that their education is a burden on their families.
Lastly, it’s always important to consult with a professional. If you’ve decided you want to purchase life insurance for students, ask an agent to walk you through your options and provide additional information.