Credit life insurance is a way to pay off your loan in the event of your death. However, coverage is not always necessary.
You are exposed to some risk when taking out a loan. This is especially true if you borrow a lot. It can be difficult to protect your loved ones from being liable for your debts in the event you pass away. But debts are not often inherited so your loved ones won’t have to pay for it.
However, in some cases, debt can have a negative effect on your loved ones. Credit life insurance reduces these risks by paying the lender back if you die before repaying the loan. This type of insurance can be expensive and not always necessary. Consider the cost of the policy before you purchase it. You might also consider term life insurance which offers less protection.
What is credit life insurance?
If you die before paying off the debt, credit life insurance will pay off your loan. The policy’s face is tied to the amount of the loan. As you pay down the debt the coverage amount will decrease. The insurer will repay any remaining debt if you die before the loan is paid off.
Credit life insurance does not protect you as well as the lender. No matter how small the loan is, your premiums will remain the same for the entire policy’s duration. Lenders are almost always beneficiaries of credit life insurance policies. This means that the payouts go directly to them, not to your heirs, if you pass away.
Different types of credit insurance
Credit life insurance is a specific type of credit insurance that pays out if you die. Other credit insurance policies repay loans when you are unable to work, have a disability, or take away or destroy personal property.
What is credit life insurance?
Credit life insurance covers mortgages, auto loans and education loans. It also covers bank credit loans and other types of loans. The amount of insurance you purchase must not exceed the loan amount.
You may have to limit the coverage of credit life insurance policies. Credit life insurance policies for mortgages in New York, for example, typically don’t cover more than $220,000. If your mortgage is $440,000 your credit life insurance policy might only cover half the loan.
Credit life insurance is generally sold by lenders or banks when you take out loans. You don’t have to buy coverage if it’s not necessary. According to the Federal Trade Commission, lenders cannot refuse to approve a loan application because the borrower has refused to buy optional credit insurance. Lenders cannot include credit insurance without you consenting or knowing.
Credit life insurance is not the only option
Credit life is not the only option when shopping for loan insurance. Before you buy a policy, consider the following options.
Credit life insurance vs. life insurance
Standard term life insurance can pay off your loans if you die, and it’s typically cheaper and more flexible than credit life insurance. The policy’s death benefit is the same regardless of loan amount and it pays out no matter how long the policy is.
Also, you can choose a life insurance beneficiary for your term policy. This means that your heirs, not the lender, will receive the money regardless of how much you have paid off the loan. They can also use the funds for any purpose.
Existing life insurance policies
You don’t have to buy more coverage. Instead, you can use your existing term or permanent insurance policy to pay a loan. Lenders may require proof of coverage to approve your loan application. You should also make sure that you are comfortable with allocating funds from your existing policy to pay the loan. This is especially important if you purchased the policy to cover certain expenses.
Traditional savings account
Savings or investments accounts can provide financial security. Insurance may not be necessary if the savings account is able to pay off any debts that remain after your death.
Are you a candidate for credit life insurance?
If your sole concern is debt inheritance, you probably don’t require credit life insurance. Because your debts rarely pass to your heirs upon your death, Instead, your estate settles your debts using your assets. If you don’t have enough money to pay the debt, your estate will settle it using your assets.
There are instances when an outstanding loan could have a negative effect on your estate planning. These are some of the situations where life insurance could be useful:
- Your estate should not be used to repay your debts. The asset that you borrowed money for, such as a house or car, may be sold to pay the lender when you pass away. This could reduce the amount that is left to your heirs. If you are unable to pay your loan payments, loan insurance will cover them.
- Co-signers should be protected When you co-sign a loan you’re equally responsible for the debt. Credit life insurance covers any debts if you are unable to pay them.
- You are a resident in a state with community property laws and wish to protect your spouse. Your assets and debts usually pass to your spouse in states that have community property laws. Credit life insurance policies pay off the loan for your spouse. Arizona, California and Idaho are all states that have community property laws.
What is the cost of credit life insurance?
The state where you live will have different credit life insurance premiums. They are determined by the amount and type of your loan. Two key factors can make the costs higher than other life insurance products:
Your health status is not an issue. As with most guaranteed issue life insurance policies, insurers generally charge higher premiums when they don’t know your medical history because the risk to insure you increases. All credit life insurance policies cannot be guaranteed. Your eligibility may be affected by your age, health, and employment status.
Lenders may include insurance premiums in the loan payment. Although this may sound good, it could end up costing you even more. This is basically borrowing money to pay for your insurance premiums. It also increases the interest rate.
Can you cancel credit life insurance?
If you have to cancel credit life insurance policies, you may be eligible to receive a refund of your premiums. There are different cancellation policies for lenders. If you have a large loan balance and are unable to pay the premium, cancelling your policy may be an option.
Ask before you purchase a policy if you can cancel your coverage early. Also, inquire about what kind of refund policy is available.