Life Insurance and Student Loan Debt

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Life Insurance and Student Loan Debt

I am on disability and had over 200,000.00 of student loan debt written off due to my health. My question is though that I am divorced and engaged to another woman. If I would pass away, could my life insurance be used to pay towards the cost of my Student Loan Debt that was cancelled. I have been informed by NELNET the provider that in 3 years it will be considered income and we are concerned whether I will have to pay taxes on it and if so could my insurance be taken to pay the taxes in the event of my death. My fianc is the only designated beneficiary at the time on my Life Insurance through Prudential for a 160,000 dollar VGLI insurance policy.
Any assistance you can provide would be greatly appreciated. I have contacted the IRS and they said it depends on what happens between now and the next three years as to the student loan being filed as income for tax purposes.

Asked on January 6, 2019 under Bankruptcy Law, Iowa

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 2 years ago | Contributor

If your fiance is the beneficiary, then your life insurance cannot be used to pay off your loans or taxes thereon: on your death, the money goes directly to him--it is never your money or your estate's money. Another person's money cannot be taken for your debts (including taxess). 
If your fiance pre-deceases (dies before you) and you do not designate another beneficiary so that the money, on your death, becomes part of your estate, at that point it is possible that a claim could be put in against your estate, for the money in it to pay off the loans or any taxes owed on them.
The important thing about life insurance is that it is a contract, not an account: it is an obligation by the insurer to pay a certain amount when the insured passes away, not money saved up by the insured in her own account or name. At that point (when the insured passes away), the insurer pays *its* own money, per the contract/policy, to the beneficiary. So there is no pot or pile of money out there owned by you to pay your beneficiary; the benefits are paid by the insurer from its funds on your death. Therefore, there is no account or funds owed by you which could be taken for your debt or for any taxes on it.


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