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.
When your only option is to cosign, life insurance can help.
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.
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.
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 The Institute for College Access and Success, private student loan debt is on the rise. Of these private loans, 90% of them are cosigned. If the borrower of these private loans dies without the loan paid in full, the cosigner is responsible in most cases.
Forty percent of student loan borrowers owe at least $20,000 upon graduation and 16% owe at least $50,000. Either way, that is a lot of money a cosigner becomes responsible for. A term policy can protect the cosigner’s finances.
Keep in mind that death isn’t the only way a cosigner becomes responsible for debt. If the borrower misses payments or defaults while alive, the cosigner is still responsible. Before you cosign or ask someone to cosign, give it a lot of thought.
When your only option is to cosign, life insurance can help. Buying a term life insurance policy is an affordable way to protect a cosigner. See how little a term policy may cost you by running a quote now.
Photo credit to: Olu Eletu
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