Most American households are now deep in debt. Total debt, which includes mortgages, student loans, car loans, credit card and other fiscal obligations, dipped during the Great Recession. However, as the economy recovered, so did buying on credit and overspending. As a result, Americans’ debt hit a new high of $13 trillion during the second quarter of 2018, exceeding the previous record set in 2008 by $618 billion, according to the Federal Reserve Bank of New York. On a personal level, debt can be crippling. It can also be one of the best reasons to buy life insurance. Let us take a look at the debt load U.S. adults carry and why life insurance can help address it.
Debt At All Ages
People talk about the student loan burden many younger adults have. There is also concern about the rising credit card balances many Americans are carrying, now at an average of $6,375. However, according to the Fed, adults of each age group are in debt.
In fact, the highest years of earning are the highest years of owing, which probably reflects mortgages. Those 45 to 54 years of age have, on average, $134,000 in debt, while those aged 35 to 44 years have at least $133,000. The numbers are staggeringly higher for people in Los Angeles, New York City or other extremely expensive housing markets, where the mortgage debts could easily triple these numbers.
Millennials are starting their careers with more debt than prior generations. About 45 percent of people under 35 have education debt. Estimates are that bachelor’s degree recipients now need an average of 21 years to pay off student loans.
In spite of that, younger adults are more comfortable assuming other debt, such as car loans, because they are confident that raises and promotions are not far off. They are planning to buy homes and have families in the foreseeable future too.
The other age group raising debt red flags is those age 60 and over. While the fact that many approaching retirement have inadequate savings has received a lot of attention, they are also carrying more debt into retirement.
Previous generations paid off their mortgage before leaving the workforce. Now, those 65 to 74 have an average of $66,000 remaining in debt; those 75 or older have $34,500 owed in debt. The balances owed illustrate budgeting difficulties retirees face as they try to live off a fixed income and deal with debt.
How Life Insurance Helps
Regardless of your age group, you need to ask what happens to your debt if something happens to you? The whole point of life insurance is to provide financial protection to your loved ones by replacing income, covering additional expenses, or paying off outstanding debts in the event of your death.
In other words, you should buy life insurance because you have debts. Generally, debts become your estate’s responsibility. Determination of remaining bills will wind up as part of probate. However, some types of debt are handled differently upon death.
Some types of student loans, car loans and mortgages that were co-signed by parents or spouses do not expire when you do. They become that person’s responsibility. Yes, parents post-retirement can suddenly wind up responsible for their child’s student loans, if something happened to their child.
Likewise, couples need to worry about debt protecting for outstanding balances, a mortgage and other liabilities being passed to the remaining partner, if one dies. This is an issue for people of all ages, even the seniors with mortgages whose fixed incomes will also be reduced if their partner dies.
Buying Life Insurance
There are two basic types of life insurance people purchase to ease the financial burden on family members and pay off debts if they should die.
Term life insurance is purchased, usually based on outstanding loan balances. Term policies generally have premiums that will not change during the “term,” which can be 10 years, 20 years or other time frames. For a parent co-signing student loans, taking out insurance on their child or requesting the child to purchase coverage can protect the parent from assuming the debt should a tragedy occur.
Some people prefer purchasing whole life or a universal life policy, which has a long-term savings component as well as the insurance coverage. The advantage of this type of plan is that the coverage does not end if the premium is paid. Conversely, term policies end and it can cost a lot more to purchase one later on. The savings accumulated can add to the policy value (and death benefit). It can also be used to augment retirement savings or cover emergencies.
Purchasing life insurance may seem like adding another bill to your debt burden. However, putting it off makes that debt even more dangerous to your family and can create hardships for your loved ones.
Weighing the right options for your situation requires talking to a financial advisor with expertise. Factum Financial can help you determine the best solution for your situation. They specialize in educating clients on ways to get out of debt and protect their family from financial disaster. They also work with clients to build their wealth and legacy.
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