Published on February 27, 2014
hij abc Debt: The inheritance no one wants Nearly one-third of Americans surveyed by Securian Financial Group say they haven’t thought about what would happen to their debt if they – or their cosigners – were to pass away unexpectedly. All generations wrestle with debt Consumer debt spiked during the Great Recession, focusing the nation’s attention on debt with an intensity not seen in decades. All generations were affected. Baby boomers, for example, grew up with the conventional wisdom to “buy as much house as you can” because the widely held assumption was that household income and home values would rise. According to a Securian survey conducted earlier this year, however, that rule of thumb had unfortunate consequences for boomers: The number of pre-retirees who expect to carry mortgage debt into retirement soared a stunning 123 percent between 2009 and 2013. (Figure 1A) In the same survey, nearly half (49 percent) of retirees held debt when they entered retirement. (Figure 1B and 1C) Of that group, 39 percent owed $50,000 or more. People who are 65 and older have more credit card debt than any other age group – nearly $9,300, on average.1 The third generation, Millennials, holds an unprecedented debt burden in the form of student loans. One in 10 recent borrowers defaulted on their student loans within the first two years – the highest rate since 1995, according to the US Department of Education. 2 At nearly $1 trillion, student loan debt is at a record high and the average 25-year-old’s student loan debt was around $22,000 in 2012. 3 F78685-4 11-2013 November 2013
Figure 1. Retirees and debt A. Expected vs. Actual Debt Upon Retirement Mortgage debt % 80 Expected Mortgage Debt Had Mortgage Debt 70 60 % 80 67% 59% 53% 48% 50 B. Expected vs. Actual Debt Upon Retirement 70 Approximately, how much debt did you carry into retirement? 71% $1,000 - $2,499 2.3% 60 30 30% 30 49% 46% 40 30% Less than $1,000 1.6% 67% 50 40 C. Retirees (n= 258) 30% $2,500 - $4,999 8.5% $5,000 - $9,999 10.9% 35% $10,000 - $24,999 21.7% 20 20 $25,000 - $49,999 16.3% 10 10 $50,000 - $99,999 17.4% 0 2007 2009 2013 In 2007, 53 percent of retirees surveyed carried debt into retirement. By 2013, the number of pre-retirees who expect to carry mortgage debt into retirement soared a stunning 123 percent. % 80 70 60 50 40 30 0 2007 Expected Debt 2009 2013 $100,000 or more 21.3% 38% of retirees carried a total debt of $50,000 or more into retirement. 36% of boomers expect to owe that much. Had Debt % 80 70 60 50 40 Source: “Retirement time bomb: Mortgage debt,” Securian Financial Group, April 2013 30 20 20 Lopsided personal balance sheets 10 10 Among the respondents in Securian’s recent survey who hold debt as 0 0 2007 2009 2013 2007 2009 2013 primary borrowers or cosigners, significant percentages could leave behind large financial obligations if they died suddenly. Twenty percent owe $100,000 or more. Forty-four percent owe $25,000 or more. (Figure 2) The state of personal balance sheets also is worrisome. More than half (56 percent) say their debts exceed their assets and 41 percent say their debt is “much higher” than their assets. (Figure 3) Figure 3. (n=802) How does the amount of debt you hold compare to your current savings or assets? The debt is much higher The debt is a little higher They are about the same The debt is a little lower The debt is much lower Total Responses Percent Count 41% 15% 13% 9% 23% 100% 329 123 100 68 182 802 Figure 2. (n=819) Approximately how much debt do you currently hold, including any debts or loans you have cosigned? Less than $1,000 $1,000 - $2,499 $2,500 - $4,999 $5,000 - $9,999 $10,000 - $24,999 $25,000 - $49,999 $50,000 - $99,999 $100,000 or more 11% 5% 7% 13% 20% 14% 10% 20% 20% owe $100,000 or more, 44% owe $25,000 or more. Debt:The inheritance no one wants – November 2013 2
If no arrangements are made for post mortem debt coverage in these cases, survivors are in the hole even after liquidating assets. Figure 4. Have you ever considered what would happen to your debts or loans if you died? (n= 1,002) Debt doesn’t always die with the borrower No When asked whether they had given any thought to what would happen to their debt if they died unexpectedly, nearly one third (31 percent) of all respondents answered, “No.” (Figure 4) 31% Then the survey asked what they think would happen. Across the various types of debt mentioned, approximately 10 percent believe that if they died unexpectedly the lender would forgive the loan or it would simply go away. That number doubles for student loan borrowers, some of whom may be eligible for federal student loan forgiveness programs. (Figure 5) 69% Yes Figure 5. Think loan would be forgiven % 20 15 10 N= Credit Card Mortgage Student Age range Other Loans 10% 890 8% Student 0 983 Mortgage 5 % Loan forgiven Credit card 790 20% Other loans 891 11% Figure 6. Marital status (n= 1,001) Widowed or never married 33% If there is no cosigner, the lender will seek to collect the debt from the estate, which could result in the sale of assets including homes, cars and other property. If a spouse, child, parent or anyone else cosigned a loan with the deceased, the cosigners are liable for the debt. A spouse is responsible in a community property state even if he or she did not cosign the loan. That’s a lot of “ifs,” considering that 57 percent of the respondents are married and another 11 percent are divorced or separated. (Figure 6) When asked how they’d feel about saddling their survivors with debt, their responses fell into three categories – regretful, prepared or unconcerned. “I would feel terrible. I do not like the idea of leaving my mistakes to other people.” “I would feel awful. But I have insurance as a part of my payment plan to prevent that.” “My ex can totally afford it.” 68% Married, divorced or separated Response Percent Count Single, never married 22% 217 Married 57% 566 Divorced / Separated 11% 107 Widowed 3% 28 Unmarried, living with significant other 8% 83 100% 1,001 Total Responses “I’m sorry but I will be dead and they can figure it out.” Debt:The inheritance no one wants – November 2013 3
Majority of cosigners step up for family Among the 1,004 people who took Securian’s survey, nearly one-fourth (24 percent) cosigned loans for others. Interestingly, the percentage of cosigners is much lower among respondents who currently have no debt of their own (11 percent). (Figure 7) When asked to select all that apply, nearly half (46 percent) of the 238 cosigners share debt with their spouses. Nearly one-third (30 percent) cosigned for their children. About one-tenth cosigned for parents or other family members (11 percent and 10 percent, respectively). Figure 7. Have cosigned loans (n= 238) % 100 89% 80 76% 73% 60 40 27% Figure 9. (n=238) For whom did you cosign? (select all that apply) 20 Percent Number My spouse 46% 109 My children 30% 72 My parents 11% 27 Other family member 10% 0 23 Friend 9% 5% When asked how they’d feel about being responsible for the debt if their cosigners passed away unexpectedly, some expressed one form or another of displeasure, including anxiety. Hold debt as Do not hold debt as All respondents primary borrowers primary borrowers Not cosigners 24% cosigned loans for others. Interestingly, the percentage of cosigners is much lower among respondents who currently have no debt (11%) 12 Credit card debt, consumer loans and mortgages were most frequently cited when asked to select all types of loans they’ve cosigned. A little more than one-fifth (22 percent) cosigned student loans. (Figure 8) 11% Cosigners 22 My ex-spouse 24% Figure 8. What kind of debt/loan(s) did you cosign? (select all that apply) (n= 238) % 40 39% “ … It would be a huge burden for me.” 30 “I would lose the car and ruin my credit.” 37% 34% 35 25 Others are prepared for the sudden loss of a cosigner. “I would expect it. We are married and applied for it all together.” “I would be upset but that is the risk you take if you cosign.” 22% 20 15 10 5 0 Credit Card(s) Mortgage Student Loan(s) Types of debt/loans Other Debt:The inheritance no one wants – November 2013 4
Huge majority of borrowers financially unprepared for sudden death When asked to select all the steps they would take to provide financial protection as borrowers or cosigners, only 127 respondents (18 percent) indicated they had no need or already have financial protections in place. Perhaps taking the survey will prompt the 698 others to take action. More than half (55 percent) said they are most likely to draw up a will to protect themselves or others from incurring debt upon the death of a primary borrower or cosigner. Forty percent said they would buy insurance to cover the debt. Nearly one-third said they would seek financial advice and/or increase their individual insurance coverage (31 and 30 percent, respectively). Figure 10. (n=825) There are a number of ways to protect yourself or others from incurring debt upon death of a primary borrower. Thinking about your debt situation, which of the following preventative actions are you likely to take? (select all that apply) Percent Number Draw up a will 55% 455 Buy insurance that would pay debt if I died 40% 331 Seek professional advice (e.g., accountant, lawyer, banker, insurance agent, etc.) 31% 254 Increase my individual life insurance coverage 30% 246 Create an estate plan 20% 161 Assume full responsibility for my loans and debts (i.e. remove cosigners) 16% 129 Buy insurance that would pay debt if cosigner died 12% 95 None, I do not have a need 9% 72 I already have protection options in place 7% 55 Other 8% 64 Preventing a legacy of loss Nobody likes to think about dying unexpectedly. And the results of this survey show that many of us don’t think about it. But if borrowers consider who – if anyone – would inherit their debt, they might be moved to take action to financially protect the cosigners on their loans and themselves as cosigners on others’ debts. It can be difficult not to share the responsibility for paying loans and credit cards. How many 18 year olds would get student loans if their parents didn’t cosign? How many couples could afford to buy homes if they didn’t apply for mortgages on the basis of their combined Debt:The inheritance no one wants – November 2013 5
incomes? And how many middle-aged adult children are providing their elderly parents with financial assistance? Insurance can be the answer. Most lenders offer inexpensive coverage for death and disability of the primary borrower. Cosigners can purchase coverage that covers the loan if the primary borrower dies. Simple term life insurance also is inexpensive, especially for younger healthy individuals. Though individual term life does not directly pay debts, the surviving cosigners can use the benefits to pay off loans for which they have become solely responsible. For others, especially those helping elderly or disabled family members manage their personal finances, power of attorney or other legal precautions protect them from becoming responsible for debt. Comments from respondents in the Securian survey describe the anguish they feel at the thought of saddling their survivors with debt. The good news is that there are many options available through financial institutions and financial advisors that help prevent an unwanted inheritance – or legacy – of debt. Debt:The inheritance no one wants – November 2013 6
1 Amy Taub, “ In The Red: Older Americans And Credit Card Debt.” (AARP Public Policy Institute, 2013) 2 US Department of Education. “Default Rates continue to rise for federal loan students,” September 2013. 3 Meta Brown, “Student Debt Overview,” Federal Reserve Bank of New York. About Securian Financial Group, Inc. Since 1880, Securian Financial Group and its affiliates have provided financial security for individuals and businesses in the form of insurance, investments and retirement plans. Now one of the nation’s largest financial services providers, it is the holding company parent of a group of companies that include Minnesota Life Insurance Company. Securian Financial Group, Inc. www.securian.com 400 Robert Street North, St. Paul, MN 55101-2098 ©2013 Securian Financial Group, Inc. All rights reserved. F78685-4 11-2013 DOFU 11-2013 A04172-1113 INSURANCE | INVESTMENTS | RETIREMENT
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