Should You Buy Life Insurance With Student Loan?

Life insurance with student debt

Even with a slew of options for paying for college, many students graduate with some form of debt. In fact, the average amount of loan debt per student is $39,351, with a monthly payment of $393. Students graduating in 2021 have an average of $30,600.

There’s also no sign that the average debt burden for future college graduates is slowing down. Whether you’re 21, 23, 25, 27 or older, graduating in 2022 or beyond, expect the average debt to increase.

When you start your adult life, you have to take on a lot of responsibilities like budgeting and choosing the right bank accounts. Another thing to consider is life insurance.

Do you need life insurance in your 20s?

While you may think you don’t need life insurance in your twenties, now is the best time to get it. The younger you take out life insurance, the cheaper it is. You are usually in your best health and have the longest life expectancy, putting you in a much lower risk class than older generations.

Buying life insurance is cheaper at 20, than at 21, 22, 23, and so on. In the 2021 LIMRA Insurance Barometer Study, 36% of millennials (born before 1998) say they need life insurance. This generation is second only to the next generation, Generation Z, with 43% saying they need it.

But if you’re a 21- or 26-year-old college student, you may not even have an income. Or maybe you just got your first job and are making less than $50,000 a year.

As a 25 or 29 year old, why would you need a life insurance policy that makes $50k or less? According to the study, people in this income bracket have the greatest need for coverage. Forty-five percent of respondents in this income bracket said they need life insurance, compared to 29% of those earning less than $100k.

If you are planning to get married or have children, the need for life insurance is much greater. Replacing your income, paying childcare as a single parent, and paying off a mortgage or student debt are just some of the things your partner can do with the proceeds of life insurance.

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Do I need to buy life insurance at age 25 if I have student loans?

The type of student loan you have can influence your decision whether you should buy life insurance at 22, 24, 26, or any other age in your 20s.

Many are under the assumption that if they are single, their debts will disappear along with them. While this may be true in some cases, it is not always the case with student loans.

While federal student loans are usually waived when the student dies, parents still have to pay for PLUS loans. The only way the lender will forgive those loans is if the parents also die.

Private student loans are rarely forgiven. Lenders have the option, but don’t expect it to be exercised to help your parents if you die in debt.

If someone – a parent, aunt or uncle, grandparent, spouse or friend signs for the loan, he or she is stuck with the rest of the debt if you die unexpectedly.

Should you pay off student loans or buy life insurance?

Your budget may only offer you one choice: pay off your student loans or take out life insurance. While it may be tempting to get rid of your student debt before 29 years or more, it may not be in your best interest.

Each year, you can deduct up to $2,500 in student loan interest from your taxes, even if you don’t itemize your tax return. There is no tax deduction for life insurance. Depending on your tax situation, it may be more beneficial to continue to pay your student debt and to buy a life insurance policy with part of the savings.

Life insurance for college ages from 20 – 29

Time and health are on your side when you buy life insurance in your 20s. Although you have a longer life expectancy, tomorrow is not promised to anyone, and your time could come at any moment.

It is overwhelming that most people buy life insurance to pay for funeral or terminal expenses. Paying off debts and replacing lost wages or income are also high on the list, as is bequeathing an inheritance.

These reasons are a mix of temporary and permanent life insurance needs. Your personal needs can help you decide which type of life insurance to buy.

Temporary needs, such as replacing income, paying for childcare, or school fees, are best suited for term life insurance. It is less expensive than permanent life insurance, but the rates are only locked in for a certain number of years, usually 10 – 40 years.

There are many options for buying term life insurance, and technology companies are jumping on board to sell digital term life insurance. It’s faster, easier, and most 20-somethings qualify without a medical exam. Here are a few options to choose from:

Permanent needs, such as paying dues or leaving an inheritance, call for permanent life insurance. Universal and all life are your options for permanent coverage. Although it is more expensive, the rates are held for life regardless of what happens to your health as you get older.

If you need both term and permanent life insurance, it may make sense to buy both types of policies. A long-term policy can survive your debts, while your beneficiary has permanent life insurance to pay the final costs.

Life Insurance Needs When Starting a New Career

It doesn’t matter how old you are, starting a career is exciting and opens up new opportunities. This is especially true if you’re 23, 25, or even 27 and just got out of college with a brand new degree.

Most employers offer a package of benefits, including voluntary benefits. This can be disability, accident and health insurance, or specific coverage such as cancer insurance. It may also include life insurance, which comes at a group rate based on age and amount of coverage.

While it’s probably cheaper to buy life insurance through your new job, read the fine print. Most group life insurance policies are non-transferable, meaning you can’t take it with you if you quit your job. And with the average working time of 2.8 years for employees ages 25 to 34, you may not stay long with your first company.

If you only buy the life insurance that comes with your job, you will lose the years you stayed there if you can’t take the policy with you. Let’s say you get the job at 24 and you end up staying until 28. Now you need to take out individual life insurance because group life is not an available advantage at your new job.

Instead of buying life insurance at 24-year rates, you’re going to pay more for 28-year rates. Compare that over the duration of a whole life or a 30-year life insurance policy, and the cost difference can be quite significant.

Final Thoughts

If you have student debt, it’s a good idea to take out life insurance so that your parents, spouse, or co-signer can pay it off. It’s best to buy it in your twenties when you’re young and healthy so you get the most coverage for less. If your future includes children, life insurance can ease the burden on your partner as a single parent.

When you buy life insurance, you buy it for those you leave behind so that the financial burden of your loss is removed. Life insurance gives your beneficiary options that they might not have had otherwise.

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