I just heard about friends of friends whose son will be a full-pay freshman at a private college this Fall. These parents plan to buy a life insurance policy for their son (with themselves as beneficiaries) with the rationale being that his education is an investment, and he has agreed to pay them back 1/2 of the tuition over a 10 or 15 year period once he’s started earning–he’s a business major. Their idea is that if the unthinkable happens and he dies before paying them back, at least they’re covered when it comes to their financial investment.
What do people think of this? Does it make sense? I never heard of anyone doing this.
I have heard of insuring the co-signers of an ed loan as well as the student to help with paying off the debt if any of them dies earlier than expected.
We did NOT ask or expect our kids to repay us any money tho S was about 1/2 pay at expensive private U and D was full pay.
We have not opted to buy life insurance on either child as we are not in any way financially dependent on them and though we would grieve we do not expect to have a financial loss when either dies.
Each family must choose the option that works for them, regardless if us strangers would have chosen a similar or entirely different path.
It seems a little odd to me. I don’t see the need for life insurance unless you have dependents. My husband and I no longer have dependents (our kids are out of college and financially independent), so we no longer have life insurance, except for the small amount that we get automatically through our jobs.
To me, it sounds a lot like a prenuptial agreement. Most people don’t need one. However, these people have worked out an arrangement where they’re counting on income from their child, so it’s probably sensible. I don’t think it’s coldblooded necessarily. Not knowing all of the details, they could be taking out a huge home equity loan or borrowing against their retirement funds (yuck) to fund their kid’s education, possibly just so it’s a much better rate than private loans, so it could be awful if they don’t get the money back.
Agree. Life insurance is really labor insurance, i.e. insuring that those financially dependent on your labor income are financially ok if you die (note that the rationale for disability insurance is similar).
However, it looks like the “friends of friends” have chosen an expensive college so that the parents paying for the college now will be financially dependent on the student after he graduates and makes what they hope is a high enough income to pay them. While this certainly fits the rationale for life (and disability) insurance for the student, it is also an arrangement that many here would hesitate to go into in the first place (i.e. many would say that the college is too expensive if it causes the parents to be financially dependent on the student’s future income).
I have heard of this more when loans are involved. Maybe the parents are tapping into equity on their house to pay for college. Term life insurance on young adults is relatively cheap. Although no one wants to see the unforeseen happen, some would view this as prudent estate planning.
To add on, many people use life insurance as an estate planning tool. I can’t say husband and I will drop all our life insurance when we no longer have dependents. I’ve always thought that if we are able we will help with the college costs for our grandchildren. (We currently don’t have any so this is a long term thought.) Although our sons will hopefully be out of school and supporting themselves, some life insurance that was purchased when we were younger could be used for this purpose.
H had a good twenty year life insurance policy that would have tided me over while the kids grew up. Same reasonable price every year. Once the 20 years passed, we were ready to drop it. Company kept urging us to re-up, at almost 10,000 dollars a year. We passed on that. I’ll take my chances at this point!
If the parents are providing or cosigning loans, especially if the student will be repaying, it is absolutely prudent to have life insurance on the student. If he or she dies, mom and dad are still on the hook for that loan. Life insurance is very cheap protection.
If they’re giving the son their retirement money in order to fund college, it makes sense. But, life insurance isn’t really enough in that case: The son could be alive and not making enough money to pay back his tuition.
Thanks for the ideas, the prenup comparison and estate planning tool are helping me make sense of what struck me as odd and cold-blooded at first, but I can see now that it does sound like prudent protection.
From what I know, these people are middle class, with a nice home and professional jobs; one of them has worked almost 30 years in a civil service job that has a good pension (a retired relative worked there and often talks about being grateful for the pension plan) They’re most probably “in the donut hole”, a phrase that I learned here on CC a few years ago but don’t think I’ve seen lately?
Weird. We, my parents and my generation have a pay it forward philosophy. Being able to do without the money for ten or more years means you didn’t really need it to live. Back in the day I figured my debts died with me (this was medical school and I signed only). Having the luxury of affording to pay for kid’s college education so he didn’t need to work during the school year was nice. He ended up getting a good job and became independent of us.
I think it is a sound idea to take out the life insurance policy. But I would also invest in a disability policy since the possibility of becoming disabled and not repaying the loan is astronomically higher then death. Might as well cover all your bases if you are depending on the repayment of the loan.
The other reason to take out insurance when your young with no dependents is to guarantee the ability to get insurance in the future depending on the type and style of the policy.
I agree with @Chardo. There have been cases where a young person died and his parents were left having to pay off the student loans, which can only add horrifically to the grief they would already be feeling. Unless you are certain that you as the parent would not get stuck paying back the loans if your child dies, it makes some sense to provide for it and a term life insurance policy on a healthy young person is cheap. If I was to do this, I would take out a 20 year term because at that point, it would be cheaper to continue it for the child on their own than for them to get a new policy at age 40 On a slightly similar note, my kids who have life insurance, through work, etc., have me as the beneficiary and it will stay that way till they marry.
I guess I’d be concerned about whether the college grad would be able to earn enough to support himself AND repay his folks what they’re counting on. So far, I know quite a few college grads that didn’t launch high-enough paying jobs to fully support themselves, never-mind trying to repay any loans. (Several had difficulty finding jobs that they liked and some went to grad or will be going to professional school.
In our case we tried to always make choices we could comfortably afford so our kids would only have to be concerned about supporting themselves instead of repaying loans as well.
I do agree that for some, life insurance can be part of estate planning, whether or not anyone has dependents.
I don’t think you can buy disability insurance on someone else. Usually it is tied to a job/salary. If not, it’s a smaller amount ($2000-4000 per month) for a short time. It would be paid to the owner of the policy (the worker/child) and of course he’d have no obligation to give this money to the parents. Most disabled people need the money for their own expenses.
I find it bizarre that people would automatically think cold-blooded. More likely you all live in a completely different financial reality than that family. My first thought was that the family’s mistake was letting their student attend a school that was requiring more debt than they can afford, but at least they were attempting to be financially prudent by taking out the insurance if a terrible tragedy occurred.
I wonder how many of you have experienced the death of a child. I have. The pain in unimaginable. I cannot fathom compounding that grief with yrs of loan payments each month that stab through the heart at thinking about the joy and excitement their child was expressing when they took out those loans and the horrible void they now face.
Fwiw, we now have life insurance on all of our kids, not large policies, but enough to cover funeral expenses. Funerals cost a lot of $$ and that bill on top of everything you deal with when a child dies is nothing more than salt in a gaping wound. Having to pay their debt for yrs to come would be the same.
Count me as someone who thinks those parents made the right decision when it comes to the insurance even if they made the wrong one by taking on unaffordable debt in the first place.