Students, Loans, and Life Insurance

by Chris Kite

Have you sold any life insurance on students?

Probably not, or not much. While many students have great potential for long-term income and wealth, they’re not yet within the main life insurance markets of income protection and wealth management. And there’s a lot of uncertainty in how each individual student will do. Could there be new services that help students build their careers and develop skills in consumer economics?

A recent article in The Advisor notes 7 of 10 college students have damaged credit soon after graduation. A key part of the problem is difficulty in paying off student loans. A few years ago, I read an article in The Economist on the daunting problems with student loans. One solution discussed was the securitization of loans where investors had incentives to help these students build their careers and manage their finances.

Purdue University has introduced a new funding option for students who need additional financial support. The Purdue Research Foundation is offering an Income Share Agreement (ISA) called, “Back a Boiler – ISA Fund”. The amount of the future payment of student loans is based on income.

If a student commits to an ISA and earns a high income after graduation, they may pay more to the fund than they would’ve with conventional debt. However, Purdue Research Foundation caps the total amount paid at 2.5 times the amount received.

Similar to a key need for life insurance, the foundation depends on the future income of the former students. The foundation may self-insure or could work with an insurance company.

On a different topic related to college, Financial Independence Group sponsors a program called College Funding Evolution. It focuses on helping parents plan college for their children. It helps with college selection, understanding financial aid qualifications, and other aspects of college acceptance. For parents who can do so, it looks at funding life insurance to provide cash value accumulation with a goal to balance college funding and retirement planning.

Typically, it illustrates policy distributions such as leveraged loans where the cash value securing the loans can grow faster than the loan charge rate. While a goal of these policy loans is to help minimize the need for student loans, these policy loans have to be carefully managed to be sure the policy stays in force to keep its tax advantages.

A common aspect in these different situations is the management of loans. What types of innovations are used (or could be used) in these situations? The College Funding Evolution uses innovations in services and life insurance that typically are focused on parents who have substantial income and assets, a traditional and attractive market segment of life insurance companies.

Harvard Business School definitions make a distinction between disruptive and sustaining innovations.

Disruptive innovation creates simpler products or services for non-consumers or underserved consumers. This disruption can eventually expand the market and create a foundation for long-term growth, but it starts with products or services that aren’t attractive to incumbent businesses and their main customers. This innovation typically takes place in a business culture that’s not mainstream. The business needs to be able to experiment quickly on a limited budget.

In sustaining innovations, the incumbent players nearly always win in improving complex services or products for their most profitable customers.

I wonder whether the Purdue Research Foundation with its implicit life insurance aspects could be considered a disruptive innovation. The percent of income paid by former students seems to be a simpler way to pay off loans. This program doesn’t build direct cash value to add to net worth, but it does add to net worth by reducing debt.

The sharing of risks related to income and mortality could be considered a type of life insurance. Determining eligibility and percent of income to pay are similar to underwriting.

Also, the foundation would have a vested interest in helping these students with their career development. Other financial services could be added later that are tied to percent of income or other options.

Could life insurance companies and advisors provide similar services with disruptive innovation for these current and former students? Probably not, if approached by traditional business units.

New business units would be more likely to have the agility, creativity, and focus to develop simpler products for a new market. For example, could a company start with career development and consumer economics courses that create incentives for the student and company to build a long-term relationship? Could that grow into mentoring and an ongoing underwriting process for future financial services?

To help build healthier careers, related ideas could be adopted from an international service called Vitality that gives customers incentives to lead healthier lives. John Hancock has implemented Vitality in the United States for its insurance products.

If you’re interested in learning more on this topic, check out this April 2018 article on MetLife collaboration with MIT to foster innovations. Or, read this 2015 article on securitizing student loans.


Life insurance products and related features, benefits and guarantees are backed by the claims paying ability if an insurance company. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. This article is for informational purposes only and does not constitute legal or tax advice. Customers should consult their legal or tax professional regarding their own unique situation.

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