More on Life Insurance
More on Life Insurance
Credit life insurance is a type of life insurance policy that pays off your debt if you die instead of leaving a death benefit to your beneficiaries.
Credit life insurance policies are designed to pay off one specific debt after you die
The policies are typically guaranteed issue and generally more expensive than term life insurance
The death benefit decreases as you pay off your debt and is not available to your dependents
A life insurance policy protects your loved ones not just from the loss of your income, but from creditors that will hold them responsible for any of your unpaid debts. Credit life insurance can help with the latter by paying off debts you still owe after you die.
Most credit life insurance policies are tied to a specific debt, such as a mortgage or auto loan. The policy doesn’t function like term life or permanent life insurance coverage, since only the creditor receives the death benefit and the coverage amount only covers the loan in question. Read on to learn about credit life insurance and whether it should be part of your end-of-life planning.
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Credit life insurance is a type of guaranteed issue, decreasing term life insurance policy. In most cases you’re guaranteed approval if you apply, and as long as you’re paying down your loan, the size of the death benefit decreases while the policy is active.
Since credit life insurance is usually tied to one debt, you could technically hold multiple credit life insurance policies attached to different personal loans. Most notably, the death benefit from credit life insurance goes directly to the creditor and your dependents never see that money. Mortgage protection insurance, which ensures that your mortgage payments continue if you die, is one of the better-known forms of credit life insurance and covers the balance left on your mortgage if you die.
You typically opt into buying credit life insurance when taking out a loan, usually an installment loan like a car or business loan, though some people also buy policies to cover credit card debt. Many people choose to add the policy to their initial loan agreement, but you might find yourself receiving unsolicited offers for credit life policies after taking on a large loan as well.
(Note that while the option is available as part of many loan agreements, it’s rare to be denied a loan just because you choose not to buy credit life insurance.)
The premiums on a credit life insurance policy vary depending on the size and type of loan you’ve taken out. The price is often higher — potentially three to four times — than that of a term life policy. Since credit life insurance policies don’t require a health assessment, the provider takes on a greater risk by insuring you without evaluating how soon they’ll need to pay out after the policy is in force.
If you bought the policy as part of your loan agreement, the premiums are generally included in your regularly scheduled loan payments or added to the overall amount you owe as a single-premium payment. As you pay down the loan, you’ll also fund the policy.
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"It’s important to understand how loan insurance works,” says Bola Sokunbi, founder and author of Clever Girl Finance. “For instance, private mortgage insurance doesn't protect you as the mortgage holder. Instead it protects the lender in the event that you default on the loan. Credit life insurance can pay off any outstanding debt if you were to pass away. However, the funds you'd use to pay for the policy's premiums might better serve you if they are going toward reducing your actual debt obligation while you are alive, healthy, and able to work.”
But if you have debts that will outlive you, like a mortgage, private student loans, or credit card debt, and if you’d have a hard time with the life insurance medical exam, credit life insurance might be an option worth exploring.
The main draw of credit life insurance is that it protects your beneficiaries from becoming financially responsible for your unpaid debts. Even if someone didn’t agree to cosign a loan for you, a creditor may be able to take what they’re owed from your estate. That means they could pull money from assets like your house, bank accounts, or investments, barring your beneficiaries from anything you hoped they’d inherit.
Credit life insurance is also an option for those who have debts but would have difficulty with the life insurance medical exam. For elderly applicants or people with persistent health concerns that would lead to higher premiums or coverage denials, a credit life policy is one option for providing basic financial protection to your loved ones.
One of the biggest disadvantages of credit life insurance is that the death benefit amount decreases as you pay off your loan. That means you might also spend more money for a smaller benefit, since credit life policies typically cost more than term life insurance. And when you die, your beneficiaries receive no part of the death benefit from credit life insurance, which means they still might suffer financially from the loss of your income.
With a traditional life insurance policy, your beneficiaries will be entitled to receive the entire death benefit. If you choose the right coverage amount, a cheaper term policy can leave your beneficiaries with enough money to both clear away your debt and support themselves financially. "Even having some sort of partial coverage is much better than having no coverage at all," Sokunbi says. She recommends building your premiums into your monthly budget.
For example, if you agree to pay $150 per month toward a credit life policy for a $400,000 mortgage and pay off half of the mortgage before you die, your death benefit would shrink to $200,000, all of which would go to the mortgage provider. In a similar scenario, you could pay around $50 per month for $750,000 of term life coverage and leave your beneficiaries with a $550,000 tax-free payout after the remaining mortgage is paid.
If avoiding the medical exam is your greatest concern, there are other no-medical exam options available. Simplified-issue policies, among others, skip the exam and provide a death benefit directly to your beneficiaries.
Amanda Shih is an insurance editor at Policygenius in New York City. Previously, she worked in nonfiction book publishing and freelance content marketing. Amanda has a B.A. in literature and communication from New York University.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.