What Is Credit Life Insurance?
Credit life insurance is atype oflife insurancepolicy designed to pay off a borrower's outstanding debts if the policyholder dies. It's typically used to ensure you can paydown a large loan like a mortgage or car loan.
Theface valueof a credit life insurance policy decreases proportionately with the outstanding loan amount as the loan is paid off over time until there is no remaining loan balance.
Key Takeaways
- Credit life insurance is a specialized type of policy intended to pay off specific outstanding debts in case the borrower dies before the debt is fully repaid.
- Credit life policies feature a term that corresponds with the loan maturity.
- The death benefit of a credit life insurance policy decrease as the policyholder's debt decreases.
- Credit life policies often have less stringent underwriting requirements.
How Credit Life Insurance Works
Credit life insurance is typically offered when you borrow a significant amount money, such as for a mortgage, car loan, or large line of credit. The policy pays off the loan in the event the borrower dies.
Such policies are worth considering if you have a co-signer on the loan or you have dependents who rely on the underlying asset, such your home. If you have a co-signer on your mortgage, credit life insurance would protect them from having to make loan payments after your death.
In most cases, heirs who aren't co-signers on your loans aren't obligated to pay off your loans when you die. Your debts are generally not inherited. The exceptions are the few states that recognize community property, but even then only a spouse could be liable for your debts—not your children.
When banks loan money, part of the risk they accept is that the borrower might die before the loan is repaid. Credit life insurance protects the lender and, by default, also helps ensure your heirs will receive your assets.
The payout on a credit life insurance policy goes to the lender, not to your heirs. Although, it is against the law for lenders to require credit insurance.
Credit Life Insurance Alternatives
If your goal is to protect your beneficiaries from being responsible for paying off your debts after you die, conventional term life insurance may make the most sense. With term life insurance, the benefit will be paid to your beneficiary instead of the lender.
Then, your beneficiary can use some or all of the proceeds to pay off debt as they need. Term coverage from a life insurance company is usually more affordable than credit life insurance for the same coverage amount.
Moreover, credit life insurance drops in value over the course of the policy, since it only covers the outstanding balance on the loan. In contrast, the value of a term life insurance policy stays the same.
Advantages to Credit Life Insurance
One advantage of a credit life insurance policy over a term life insurance policy is that a credit insurance policy often has less stringent health screening requirements. In many cases, credit life insurance is a guaranteed issuelife insurance policy that does not require a medical exam at all.
By contrast, term life insurance is typically contingent on a medical exam. Even if you're in good health, the premium price on term insurance will be higher if you purchase it when you are older.
Credit life insurance will always be voluntary. It is against the law for lenders to require credit life insurance for a loan, and they may not base their lending decisions on whether or not you accept credit life insurance.
However, credit life insurance may be built into a loan, which would increase your monthly payments higher. Ask your lender about the role of credit life insurance on any major loan you have.
Who is the beneficiary of a credit life policy?
The beneficiary of a credit life insurance policy is the lender that provided the funds for the debt being insured. The lender is the sole beneficiary, so your heirs will not receive a benefit from this type of policy.
Do you need credit insurance?
While credit life insurance is sometimes built into a loan, lenders may not require it. Basing loan decisions on acceptance of credit life insurance is also prohibited by federal law.
What is the aim of credit life insurance?
One main goal of getting credit life insurance is to protect your heirs from being saddled with outstanding loan payments in the event of your death. Credit life insurance can protect a co-signer on the loan from having to repay the debt.
The Bottom Line
Credit life insurance pays off a borrower's debts if the borrower dies. You can generally purchase it from a bank at a mortgage closing, when you take out a line of credit, or when you get a car loan, for examples.
This type of insurance is especially important if your spouse or someone else is a co-signer on the loan because you can protect them from having to repay the debt. Consider consulting a financial professional to review your insurance options and to help you determine if credit insurance is right for your situation.
FAQs
Credit life insurance is generally a type of life insurance that may help repay a loan if you should die before the loan is fully repaid under the terms set out in the account agreement. This is optional coverage. When purchased, the cost of the policy may be added to the principal amount of the loan.
What is credit life insurance used for? ›
Credit life insurance is a type of life insurance policy designed to pay off a borrower's outstanding debts if the policyholder dies. It's typically used to ensure you can paydown a large loan like a mortgage or car loan.
What is a disadvantage to a credit life insurance policy? ›
Potential Drawbacks of Credit Life Insurance
Premiums can be more expensive than regular life insurance: Since credit life insurance doesn't require a medical exam, the coverage could be more costly than traditional life insurance. If you're in good health, you might pay less by buying your own life insurance policy.
Do you want a credit life insurance? ›
Ans: Credit life insurance is important as it secures your financial dependents like spouse or kids from having to bear the burden of repayment of remaining loans.
Why is credit life insurance not such a good deal? ›
Credit life insurance is only offered by lenders on large loans, like home loans and auto loans. There's a greater risk associated with credit life insurance when compared to traditional life insurance, so there is a higher cost for credit life policy premiums.
Is credit insurance worth it? ›
You pay the premium, and if you lose your job, become unable to work due to a disability or die, the insurance protects the lender by making payments on your behalf. Credit insurance may help you sleep at night, but the cost can be high for little payout.
How much does credit life cost? ›
The average amount of new credit life coverage is about $6,000. The national average rate across the nation for credit life insurance is 50 cents per $l00 per year of coverage. That means a consumer pays $30 a year to insure a $6,000 loan – 8.2 cents a day.
Who is the beneficiary of a credit life policy? ›
Credit life insurance is issued on the life of the person who has the debt (debtor) and the creditor owns and is the beneficiary of the policy.
Which is not allowed in credit life insurance? ›
Option D) Creditor requiring that a debtor has a life insurance: This is NOT allowed in credit life insurance. The creditor cannot require the debtor to have a separate life insurance policy. Credit life insurance is designed specifically to cover the outstanding debt in case of the debtor's death.
What are the three types of credit insurance? ›
There are five types of credit insurance; four for consumer credit products and the fifth for business. These are: 1) credit life insurance, 2) credit disability insurance, 3) credit unemployment insurance, 4) credit personal property insurance, and 5) trade credit insurance/family leave or leave of absence insurance.
Banks, credit unions, car dealers and finance companies may offer a credit life policy when you apply for a loan or credit line — but you're not required to buy it.
What is the maximum age for credit life insurance? ›
Is there an age limit for credit life insurance? There's no set (or industry-wide) rule regarding age limits. Before signing up for a credit life policy, though, check the fine print for any age-related rules. For example, some policies end when a borrower reaches age 70.
How does credit insurance work? ›
This insurance policy pays all or a portion (i.e. monthly payment) of the outstanding debt if an event that is named in the policy occurs (i.e. death, disability or involuntary unemployment of the insured). The insurance company usually pays the money directly to the creditor or lender.
Who benefits from credit life insurance? ›
If you purchase a policy, the lender or bank is the beneficiary and gets the payout, not your family. Credit life protects the interests of the lender. Some of these policies are tied to the face value of the borrower's debt balance. As you pay off your outstanding debt balance, the face value of the policy decreases.
What does credit life insurance insure the life of? ›
Credit life insurance covers a large loan and benefits its lender by paying off the remainder of the loan if the borrower dies or is permanently disabled before the loan is paid in full. Here's how it works: A borrower takes out a mortgage on a new home and opens a credit life insurance policy on that loan.
Who normally pays the premiums for group credit life insurance? ›
If you take out a major loan, such as a mortgage, line of credit or student loan, the lender may offer you such an optional policy. In those cases, the borrower will be responsible for the policy's premium payments, which are typically bundled with the principal of the loan and part of your monthly payments.
What are the benefits of credit card life insurance? ›
Credit Life Insurance – This policy will pay off all or a portion of the loan if the insured dies during the term of coverage. The amount paid depends upon the policy's limits. Some of these policies have a maximum amount that they will pay, which may be less than the amount of the loan.
Who would be the beneficiary in credit life insurance? ›
If you purchase a policy, the lender or bank is the beneficiary and gets the payout, not your family. Credit life protects the interests of the lender. Some of these policies are tied to the face value of the borrower's debt balance. As you pay off your outstanding debt balance, the face value of the policy decreases.
What is credit insurance and how does it work? ›
If you lose your job or become unable to work due to some type of disability -- and these events prevent you from making the necessary loan payments -- credit insurance protects the lender from your inability to repay the loan by making payments to the lender on your behalf.
What policy is most commonly used in credit life insurance? ›
Credit life insurance is often a guaranteed issue policy, so you won't have to go through a health exam to get it. However, since guaranteed issue policies are a higher-risk type of policy for insurers to provide, they tend to be more expensive than other options if you're in good health.
