What is credit insurance? What is credit life insurance?
What is credit life insurance?
First, credit insurance is not insurance that provides life insurance. This is according to Kevin Lynch, an assistant professor of insurance at The American College, Bryn Mawr PA. Credit life insurance, as the name suggests, is an insurance policy that the borrower takes out for the lender’s benefit. Lynch admits that it can be confusing. Lynch says that even though they are two different products, they can often achieve very similar results. Credit life insurance is completely different to permanent insurance which is meant to last for the duration of your life.
To add confusion, the marketing slogan “credit life” can also be used with standard-life insurance policies. Insurance agents suggest that regular insurance is a way of paying off the mortgage. Gaspar Insurance CEO Tim Gaspar in Encino, Calif. said that this slogan has little to do with the policy’s nature and usually leads to the consumer paying more. Gaspar states that if someone is looking for life insurance, and hears that term, it’s best to look elsewhere.
What is credit life insurance?
Credit life insurance typically covers any outstanding loan debt. A typical policy will require the borrower to pay a premium, which is often added to their monthly loan payment. This allows the lender’s full payment in the event that the borrower dies prior to paying the loan. The title to the underlying asset will then be transferred to the borrower’s estate, and ultimately to the beneficiaries.
Lynch states that credit life insurance is often offered in conjunction with home loans and auto loans. If you and your spouse have a home and you owe the mortgage on it, your credit life insurance will pay the remainder.
What is the cost of credit life insurance?
Although credit life insurance rates are dependent on the loan amount these policies may be more expensive than traditional life insurance . The cost of a credit policy for credit life insurance depends on several factors, such as the type of credit and the amount of the loan.
Lynch states that credit life insurance is generally more expensive because of the higher risk involved with it. This leads to higher premiums.
Credit life insurance, also known as guaranteed issue products, has a higher risk because eligibility is determined solely based on your status as borrower. Lynch says that unlike most life insurance policies, applicants will not need to undergo a medical exam.
Before you buy credit life insurance
Credit life insurance can be more expensive than regular life insurance, but it is meant to benefit the lender. There are some things you should consider before purchasing it.
Credit life insurance may be an option if you:
- As you reduce your debt, you don’t want to pay more for coverage that is decreasing. This is a smart choice, as you’ll be paying less each month for protection.
- Because of the medical exam, you cannot purchase life insurance through regular channels. A medical exam is not required for credit life insurance.
- You may not be able to get enough life insurance to pay off any debts you might leave behind. Credit life insurance can help you pay the debts, so your loved ones are not responsible.
Credit life insurance, taxes
CPA Ryan S. Himmel, co-founder of BIDaWIZ (an online service that connects consumers and financial professionals in New York), says that taxes are not something the consumer should worry about when it comes to credit life insurance.
Himmel states that the proceeds from an insurance policy are used to pay off debt. Himmel also says that the insurance provider is the beneficiary of the policy and not the family members. Therefore, there would be no inheritance or estate tax implications.
If your spouse or you die while you were a credit-life insurance policy holder, there would be no tax obligation on the policy payout to cover the insured debt. If a couple holds a credit policy on their home loan and one of them dies, the policy will cancel their obligation to continue paying that loan. They will not have to pay any additional taxes as a result.
Credit life insurance is not the only option
There are other options than credit life insurance. These are some alternatives for those who don’t want credit life insurance.
Existing life insurance policies
Your lender may be able to allow you to use some of your existing life insurance policy to pay your debt. If this is possible, you will need to check with your lender and provide proof of coverage.
Term life insurance
Term insurance may be a good choice for people who need coverage for a short time and have outstanding debts that they must pay off in the event of an emergency. Term life insurance is typically offered for 5-10 years. However, it may also be available for 20-30 year terms. Term life insurance policies are generally cheaper than credit life policies.
Your lender may not require you to have credit life insurance if you are able to pay off your debts with money from an investment or savings account. Ask your lender about this option.
Questions frequently asked
Is there a medical exam required for credit life insurance?
Medical exams are not necessary because credit life insurance covers a loan and not a person.
Are you liable for taxes if your credit life insurance pays off the debt?
Most cases, you will not owe any taxes once your credit life insurance policy covers your loan.
Credit life insurance: Are there any exclusions?
Rarely. Exclusions with this policy are much less common than traditional life insurance.