What Is Credit Life Insurance?
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.
The face value of 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.
- 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 issue life 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.