Student loans have long been a source of insurmountable debt and financial stress for many individuals and families in America. Although higher education is an accolade worth pursuing for both personal and professional reasons, it still comes with a hefty price tag that can be difficult for many graduates to dig their way out of. The impacts of the pandemic certainly didn’t help an already pressing issue, but from that came long-awaited action from the federal government. Recently, student loan relief was passed to allow for $10,000 to be waived from each individual federal borrower, with an additional $10,000 available for undergraduate Pell Grant recipients. This amount of money wiped away from American student loan debtors is a huge weight off of their shoulders, and will hopefully inspire further growth and stimulation in the economy as we continue to recover from the pandemic.
This fall, applications for the waiver of student loan debt will be made available. This means many Americans will be able to clear a significant portion of their debt, which may be a great time to reevaluate their current financial situation and life insurance needs. Whether you already have life insurance or are looking to obtain coverage, these shifts in debt could make a big difference in your coverage and budget.
Life Insurance for Debts and Loans
Life insurance is an important policy to carry for anyone with dependents and debt to alleviate the financial impact of their passing. While we all hope to live long enough to see our debts paid off in full, unexpected circumstances can interfere with this goal. Leaving life up to chance is a risky move, which is where life insurance can be used to create more certainty in unpredictable situations. One of the most important reasons to carry life insurance is to pay off any outstanding loans and debts upon your passing. This removes them from your spouse, dependents, parents, or any other associated family members or representatives that may be left financially responsible for your debts.
Aside from a mortgage, student loans are often the highest form of debt for most Americans. When you choose a life insurance policy, it is important to consider all debts and loans to see how much money would be needed to effectively pay off everything and clean the slate. Trying to figure out what all to cover can be quite cumbersome. With this calculation tool below, you can easily determine your own exposures and determine an appropriate amount of life insurance. Feel free to print or copy and paste this information into a Word document to keep a record of your current needs. This can be a helpful tool for you to better understand your current situation and for your life insurance agent to determine what adjustments or coverage may be necessary.
Estimate Your Individual Life Insurance Needs
Auto Loans
Vehicle 1: $____________
Vehicle 2: $____________
Vehicle 3: $____________
Property Loans
Mortgage: $____________
2nd Home: $____________
Rental 1: $____________
Rental 2: $____________
Land: $____________
Student Loans
Federal: $____________
Private 1: $____________
Private 2: $____________
Parent Plus: $____________
Business Loans
Private 1: $____________
Private 2: $____________
Income
Primary: $____________
Secondary: $____________
SSI: $____________
Funeral Expenses
Burial: $____________
Cremation: $____________
Headstone: $____________
Memorial: $____________
TOTAL: $____________
Now that you have an idea of your current debts and financial needs, you can begin to explore life insurance options that can cover your individual situation. There are many types of life insurance, but the two primary forms to be aware of are Term and Whole.
Term Life Insurance
Term Life Insurance has a set amount of time that it will cover you for at a specific monthly or yearly rate. Often, Term Life Insurance is sold in periods of 10, 20, or 30 years at a time. Once that time period is up, the policy will be offered for a renewal at a new rate for another 10, 20, or 30 years, respectively. The rate will be determined based on your new age. This means if you were 21 when you bought a 20-year policy, it would renew when you were 41 and your rate would be based on this new age. Oftentimes, the renewal rate will be considerably higher than your current policy each time you opt to continue a Term Life Insurance policy upon expiration.
Term Life Insurance can be a great option for covering debts since loans often follow an established time period as well. For example, mortgages may be set up as a 30-year loan, or auto loans may have a 5-year repayment plan. This can make it easier to break up your debts into periods of your life so you can opt for the right coverage as you age and pay off different loans. For some people, carrying multiple life insurance policies can be a cost-effective and beneficial way to approach life insurance because it allows you to alleviate additional life insurance from your budget as you pay off each debt. With the previous example, you could opt to carry a 30-Year Term Life policy for your mortgage and a 10-Year Term Life policy for your auto loan.
Whole Life Insurance
Whole Life Insurance is a policy that covers you for your whole life and does not have an expiration date. This means if you purchase the policy when you are 21, it will continue to cover you as long as you choose to pay for it and carry it. Rather than having to worry about a rate increase every 10, 20, or 30 years, you can confidently maintain one consistent payment and budget accordingly. This route helps prevent you from getting rated out of your insurance, meaning your policy will never be at risk of becoming too expensive as your age changes.
Whole Life Insurance is best for covering your lifelong risks or final wishes. This includes things like your regular income, funeral expenses, or funds you wish to be able to pass to your children, spouse, or other family members. Whole Life Insurance is still a viable option for debts, but note that your face amount may become higher than your needs as you pay off your debts. For example, let’s say you have $300,000 in debt at age 30 and opt for a policy with a $500,000 face amount to cover your debt and final expenses. When you reach age 60, you may find that your debt has been paid down significantly or perhaps completely. You now have an additional $300,000 in death benefits that you technically no longer need. It can still be disbursed to your beneficiaries upon your passing, but the rate you pay each month for the policy will still be based on the $500,000 original need, so you will be paying extra for the additional coverage.
Maximizing Your Options
One approach to consider is opting for a combination of Term Life and Whole Life Insurance to cover yourself more adequately over an extended period of time. Using the example above, you could cover your $300,000 debt with Term Life Insurance policies and your $200,000 income and goodwill death benefit through a Whole Life Insurance policy. This allows you to budget your needs based on your changing debts throughout your life.
All of this information is merely food for thought, and the best way to make a decision about your life insurance needs is to talk to a qualified, licensed insurance professional. Nicholson & Associates proudly represents multiple high-rated life insurance companies and has a team of agents ready to help you find the right coverage for you. If you’re ready to reevaluate your debts and life insurance needs, contact us today to learn more!
