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Life Insurance 

Term Life Insurance for Cosigners

Whether it’s to further your education, buy a car or home, or even just buy a new couch, you likely need credit.  Good credit is hard to establish and if you’re just starting out, qualifying for a loan can take some effort.

It’s not unusual for someone to need a cosigner in order to obtain a loan.  Parents, grandparents, other relatives, and even friends are sometimes willing to help their loved one out by cosigning on a loan for them.  Cosigning on a loan means the cosigner is responsible to pay the balance if the borrower doesn’t.

Are you a cosigner or considering it?  If the borrower dies and the loan amount falls to you, will you be ready to make all the necessary payments?   If not, the following may happen:

  • Your credit could be damaged
  • You may be charged late fees
  • Debt collectors might start calling
  • You may be sued
  • Your wages may be garnished
  • You could go into bankruptcy
  • You may find difficulty being approved in the future

Cosigning a loan is a risk, but life insurance can help mitigate it.

Life Insurance to Protect a Cosigner

There are two ways to buy term life insurance to protect a cosigner.

  • The loan borrower buys a term policy on him or herself for the loan amount and names the cosigner a beneficiary.
  • The cosigner buys a term policy on the borrower for the loan amount and cosigner is both owner and beneficiary.
  • Example 1:

    Jane Smith recently divorced from her spouse.  During the marriage, her ex-husband made some poor financial decisions which destroyed Jane’s credit.  To help Jane move, her mother (Nancy) offered to cosign on a mortgage for her.

    Jane was able to purchase a home with a 30-year $250,000 loan.  To protect her mother’s finances, Jane decides to buy an inexpensive 30-year term life insurance policy and name her mother as beneficiary.  Should Jane pass away unexpectedly before her mortgage loan is completely paid off, her mother won’t have to deal with selling the home during her time of grief and instead can just pay off the balance.

    Policyowner: Jane Smith

    Insured: Jane Smith

    Beneficiary: Nancy Smith

    With this setup, Jane pays the policy’s premiums and has control over the policy.

    Example 2:

    Using the same scenario, Jane’s mother could instead purchase the 30-year $250,000 policy on her daughter.

    Policyowner: Nancy Smith

    Insured: Jane Smith

    Beneficiary: Nancy Smith

    With this setup, Nancy pays the policy’s premiums and has control over the policy.

    With either arrangement, the cosigner is protected in the event of the death of the borrower.

    If you cosign on a home in which you don’t live in, you can plan to simply sell the home and a life insurance policy may not be necessary.  If the borrower dies, a house is a tangible asset that can protect the cosigner.  Same goes with the cosigner of an auto loan – the car can just be sold off.  However, with some cosigned debt like student loans or credit cards, a simple fix isn’t so easy to come by.

    Leaving Behind Credit Card Debt

    If you die with credit card debt, creditors typically go to the deceased’s estate for repayment.  However, if the credit card was cosigned, the creditor will go after the cosigner.

    Unlike with a home or auto loan, with credit card debt, the cosigner can’t just sell the asset to pay the balance.  He or she will need to figure out how to pay it out-of-pocket, unless a term policy exists to pay it instead.

    Leaving Behind Student Loan Debt

    If you only have federal student loans, there is nothing to worry about.  Federal student loan debt is discharged upon the death of the borrower.  Private student loans are a different matter.

    According to

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