Debt and Co-signing: What Clients Need To Know
Given the level of indebtedness in America, the topic of debt might be a door opener to a life insurance discussion. Or at least, it could lead to a discussion about financial protection in the event that a person dies with outstanding debt.
Consider what’s going out there in debt-land: More than half (56 percent) of 1000 Americans surveyed by Securian Financial Group in late 2013 said their debts exceeded their assets. In fact, 41 percent said their debt is “much higher” than their assets. For 20 percent, the debt load was $100,000 or more.
A lot of the debt is due to mortgages, but some of it is due to co-signing other types of personal loans, too.
Amazingly, nearly one– third (31 percent) of the survey group said they had not given any thought to what would happen to their debt if they died unexpectedly.
That’s a bit unnerving, considering the possible outcomes in the everyday world. According to Securian, those outcomes could include:
If there is no co-signer, the lender will seek to collect the debt from the estate. That could result in the sale of assets including homes, cars and other property, an event that insurance advisors often witness.
If there is a co-signer, such as a spouse, child, parent, or anyone else, the co-signer/s will be liable for the debt should the primary debtor die.
In a community property state, a spouse is responsible for the debt, even if the surviving spouse did not co-sign the loan.
Over the years, I’ve encountered people in each of those situations, and it wasn’t pretty. Selling the family home to cover the debt was traumatic for some survivors, especially grieving elderly spouses. But when the survivors have co-signed personal loans for cars, furniture, a business start-up, etc., regret often accompanies the grief. This is regret for having co-signed without putting a plan in place should the primary debtor die before the loan is repaid. Several such co-signers have confided that they “wish they had never done that.”
Insurance professionals could help avert some of this trauma, pain and remorse by pointing out the exposure and helping clients construct a Plan B should they carry debt.
Securian offers some suggestions: One is for borrowers (and/or co-signers) to take advantage of the lender’s offer of comparatively inexpensive death and disability insurance on the primary borrower, or for co-signers to purchase coverage that covers the loan if the primary borrower dies. It would seem that advisors could provide education on this, as a value-added if nothing else.
Another suggestion is for the borrower/s to purchase simple term life insurance, the proceeds of which the co-signer can use to cover the debt should the primary borrower die. This insurance can be established even after the loan is set up. Depending on the size of the loan, the coverage could be well worth the cost.
Another value-added is to nudge clients to put in place power-of-attorney or other legal measures that help protect against responsibility for debt if, say, the client helps an elderly or disabled family member manage the person’s personal finances, Securian says.
Even pointing clients to resources on debt and co-signing can be time well spent.
Talking about debt is probably not the life insurance advisor’s first choice. But since exposure to debt can impact other financial arrangements, including the type and amount of insurance a customer might buy, such discussion could prove to be very important.