Credit Life Insurance: What it is and Who Needs it
Credit life insurance is a form of life insurance policy that pays out a borrower's unpaid obligations if the policyholder dies. It is commonly used to ensure that you can pay off a major loan, such as a mortgage or auto loan.
A credit life insurance policy's face value is reduced proportionally with the existing loan amount as the debt is paid off over time until there is no leftover loan balance.
How Credit Life Insurance Works
Credit life insurance is often available when you borrow a big sum of money, such as for a mortgage, vehicle loan, or huge line of credit. The policy pays to repay the loan if the borrower dies.
Such plans are worthwhile to consider if you have a co-signer on the loan or dependents who rely on the underlying asset, such as your home. If you have a co-signer on your mortgage, credit life insurance will keep them from having to make loan payments after you die.
In most circumstances, heirs who are not co-signers on your loans are not compelled to repay them after your death. Your debts are typically not inherited. The only exceptions are the few states that recognize communal property, and even then, only a spouse, not your children, may be held accountable for debts.
When banks lend money, they take the risk that the borrower may die before the debt is repaid. Credit life insurance protects the lender while also ensuring your descendants obtain your possessions.
Credit Life Insurance Alternatives
If you want to shield your beneficiaries from having to pay off your debts after you die, conventional term life insurance may be the best option. With term life insurance, the benefit is distributed to your beneficiary rather than the lender.
Your recipient can then utilize some or all of the proceeds to repay debt as needed. Term coverage from a life insurance company is typically less expensive than credit life insurance for the same coverage amount.
Furthermore, credit life insurance loses value over time because it only covers the loan's outstanding sum. A term life insurance policy, on the other hand, maintains its value over time.
Advantages to Credit Life Insurance
A credit life insurance policy has less strict health screening standards than a term life insurance policy, which is one of its advantages. Credit life insurance is often a guaranteed issue policy that does not require a medical check.
In contrast, term life insurance is often subject to a medical checkup. Even if you're in good health, buying term insurance later in life will result in a higher premium.
Credit life insurance will always be voluntary. Lenders are not permitted by law to request credit life insurance for a loan, and they may not rely their lending choices on whether 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?
A credit life insurance policy benefits the lender who provided funds for the insured debt. Your heirs will not benefit from this sort of policy because the lender is the lone beneficiary.
Do you need credit insurance?
Credit life insurance is sometimes included in loans, but lenders may not need it. Federal law also prohibits loan choices based on the acceptance of credit life insurance.
What is the aim of credit life insurance?
One of the primary goals of purchasing credit life insurance is to keep your heirs from being burdened with outstanding loan payments in the case of your death. Credit life insurance can safeguard a co-signer from having to repay the loan.
The Bottom Line
Credit life insurance pays off a borrower's debts if the borrower dies. You can usually receive it from a bank when you close on a mortgage, take out a line of credit, or get a vehicle loan, for example.
This form of insurance is especially significant if your spouse or someone else is a co-signer on the loan, as it protects them from having to repay the amount. Consider consulting a financial advisor to explore your insurance alternatives and assess whether credit insurance is appropriate for your needs.