Term life insurance for dentists with student loans

What happens to your loans if you die

It depends on who holds them.

Federal loans. Federal student loans are discharged when the borrower dies, once a family member or representative sends the servicer a death certificate. They don’t pass to your spouse or estate. Parent PLUS loans are also discharged if the parent or the student dies.

Private loans, including refinanced loans. The CFPB says private lenders aren’t legally required to cancel loans when a borrower dies. Some lenders do discharge at death, but in some cases the debt can pass to a spouse or cosigner. Read your promissory note or ask your servicer.

Cosigned loans. This is the case to watch. In 2014 the CFPB reported that many private loan contracts let the lender demand the full balance when a cosigner dies. If a parent cosigned your loans, or you cosigned for someone, find out what your contract says.

This is one more cost of refinancing that doesn’t show up in the rate. Refinancing turns federal loans into private ones and ends access to RAP, PSLF, federal forgiveness, and federal forbearance and deferment for those loans. It also swaps the federal death discharge for whatever your new lender’s contract says.

Who needs term life, and who doesn’t

The NAIC’s first question is whether you need life insurance at all. Then it asks how much of your family’s income you provide.

You usually need it if:

• A spouse, partner or children depend on your income.
• You have a mortgage, a practice loan or other debt someone else would inherit or co-own.
• A parent or spouse cosigned private or refinanced student loans.

You usually don’t need much, if any, if you’re single, have only federal loans, and no one depends on you. Don’t buy a policy to “cover” federal loans that would be discharged anyway.

Term vs cash value

NAIC describes term life as lower-cost coverage for a set period, such as 10 or 20 years. It pays your beneficiaries if you die during the term. Cash value policies (whole, universal and variable life) last as long as you keep paying and include savings or investment features.

For most new dentists with loans, the need is temporary: it lasts until the kids are grown and the debts are paid. That’s what term is built for. If someone pitches you a cash value policy, ask what problem it solves that term plus investing wouldn’t.

How much coverage

There’s no single right number. A common approach is to add up what your family would need, then subtract what they’d already have.

Add:

• Private, refinanced and cosigned student loans that wouldn’t be discharged.
• The mortgage balance, if you want it paid off.
• Years of income your family would need to replace.
• Future costs you want covered, such as childcare or college.

Subtract:

• Existing coverage, including group life through an employer or association.
• Savings and investments your family could use.

Example: an associate with a spouse and two young children. They have $150,000 in refinanced private loans, a $450,000 mortgage and want to replace $100,000 a year for 12 years ($1,200,000). Add $100,000 for college and the total is about $1,900,000. Subtract $200,000 in group coverage and savings, and the need is about $1,700,000. Round to a coverage amount carriers offer.

Your numbers will differ. The point is to size it from real debts and years, not a rule of thumb.

How long a term

NAIC suggests asking how many years you expect to need a death benefit. Match the term to the longest-lasting need.

• If your youngest child is 2, a 20- or 25-year term covers them through college age.
• If your mortgage has 30 years left, a 30-year term covers it, but you may not need the full amount that long.
• If your only need is a cosigned private loan, a shorter term matched to its payoff may be enough.

Some term policies let you renew at the end, even if your health has changed, but NAIC notes the renewal premium may be higher. Ask what renewal would cost and whether the right to renew ends at a certain age.

Laddering

Your need shrinks over time as debts get paid and kids grow up. Laddering matches that by buying two or three policies with different terms instead of one big one.

Using the example above, you might buy $1,000,000 on a 20-year term and $700,000 on a 30-year term. For the first 20 years you’re covered for $1,700,000. After that, $700,000 stays in place while the mortgage finishes.

Laddering can cost less than one policy for the full amount over the longest term, so price both ways. It does mean more policies to track.

What to watch when you buy

NAIC’s checklist is short and worth following:

• Fill out the application honestly. Insurers check, and false answers can reduce or cancel coverage.
• Don’t cancel an existing policy until the new one is in force.
• Check that beneficiary names and Social Security numbers are correct.
• Insurers won’t pay a minor directly. For young children, consider naming a trust.

What to do next

1. List every student loan and mark it federal, private, refinanced or cosigned. Check studentaid.gov for your federal loans.
2. For each private loan, find the death and cosigner clauses in the promissory note, or ask the servicer in writing.
3. Add up your needs and subtract existing coverage, using the steps above.
4. Pick a term, or a ladder, that matches your youngest child’s age and your longest debt.
5. Get online quotes for the same amount and term from at least two companies. An online agency such as Ethos can show several carriers.
6. Before you refinance federal loans, read when refinancing is a mistake. Then make sure you have disability insurance, which protects your income while you’re alive.