Credit 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.

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Amanda Shih

Amanda Shih

Editor & Licensed Insurance Expert

Amanda Shih is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Her work has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Updated January 7, 2021|3 min read

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A life insurance policy is meant to protect your loved ones not just from the loss of your income, but from bearing responsibility for any of your unpaid debts. Credit life insurance can help with the latter by paying off the balance of a loan after you die.

Most credit life insurance policies are tied to a single debt, such as a mortgage or business loan. Your lender is the sole beneficiary of the policy and death benefit only covers the loan in question. While credit life insurance might be an option if you can’t qualify for a traditional life insurance policy, for most people, term life insurance is a simpler and more affordable way to cover your debts and provide financial support directly to your loved ones.

Key Takeaways

  • Credit life insurance policies are designed to pay off a specific debt after you die

  • The beneficiary of credit insurance is your lender

  • Credit life policies do not require a medical exam or questionnaire

  • A term life insurance policy is a more affordable and flexible way to protect your loved ones financially

What is credit life insurance?

Credit life insurance is a form of credit insurance, which includes other insurance products that pay your debts if you are unable to, like unemployment or disability credit insurance. Credit life is issued as a guaranteed issue policy with a decreasing term. You’re guaranteed approval, and as you pay down your loan, the face value of your policy decreases. If you die while the policy is in force, your insurance provider pays a death benefit to your lender.

Mortgage protection insurance, which covers the balance of your home payments if you pass away, is one of the better-known forms of credit life insurance.

How does credit life insurance work?

You typically have the option to buy credit life insurance when taking out an installment loan or large line of credit, like a home or business loan. Because credit life policies are generally purchased in tandem with a loan, premiums are usually priced into your loan payments.

You won’t need to go through the underwriting process to qualify for credit life insurance, easing approval for those whose health conditions might disqualify them from buying a traditional life insurance policy.

How much does credit life insurance cost?

The premiums on a credit life insurance policy depend on the size and type of loan you’ve taken out. However, because credit life insurance policies don’t require a health assessment, the provider takes on a greater risk by insuring you. As a result, the premiums are often higher than those of a comparable term life policy.

Because your policy is usually built into your lending agreement, you’ll fund the policy as you pay down the loan.

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Who should get credit life insurance?

If you have co-signed loans or debts that will outlive you and you would have difficulty qualifying for term or permanent life insurance, a credit life policy could be worth exploring. But if you do qualify for traditional life insurance, you’ll get more value for your money by buying a standard policy that pays out directly to your loved ones and can finance more than debt repayments.

"It’s important to understand how loan insurance works,” explains Bola Sokunbi, founder and author of Clever Girl Finance. “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.”

For the average person, credit life insurance’s limitations — covering only one debt, paying out only to creditors, and a decreasing death benefit — won’t outweigh the benefit of guaranteed approval. Even if you have existing health concerns, don’t assume that you won’t qualify for a more affordable term life policy. An independent insurance broker like Policygenius can help you find the right company for your circumstances. If you choose the right amount of coverage, a cheaper term policy can leave your beneficiaries with enough money to both cover your debt and support themselves.

Credit life insurance FAQ:

How does credit life insurance work?

Credit life insurance is usually purchased to insure a specific loan. You pay premiums for the policy and if you die before the loan is repaid, your life insurance provider pays the balance to your creditor.

Who is the policy owner in credit life insurance?

You are the owner of your credit life insurance policy, but the policy’s beneficiary is your lender, rather than beneficiaries of your choosing.

Is credit life insurance a good idea?

A credit life policy doesn’t make sense for most people, who will get more flexibility and value out of term life insurance. If you don’t qualify for traditional life insurance and need a death benefit that covers a large debt, then you may consider credit life insurance.

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