What is credit life insurance?
Credit life insurance is a type of life insurance policy that pays off a loan if you die before settling the debt. Your lender is the sole beneficiary of your credit life insurance policy, and the death benefit only pays for the loan covered by the policy.
Mortgage protection insurance, which covers the balance of your home payments if you pass away, is one of the better-known uses of a credit life policy.
What are the pros & cons of credit life insurance?
Pros of credit life insurance
Covers a debt that outlives you when you can’t qualify for traditional life insurance
Most policies offer guaranteed approval with no medical exam
Cons of credit life insurance
Premiums are more expensive than comparable term life insurance policies
Death benefits only pay the lender and won’t go to your loved ones
Funds you use to pay for premiums could instead be used to pay down your debt while you’re alive
How does credit life coverage work?
When you take out a large line of credit like a home or business loan, you may be offered the opportunity to buy credit life insurance. Because credit life policies are generally sold by the lender alongside the loan, the premiums can often be included in your loan payments.
You won’t need to go through the underwriting process to qualify for credit life coverage, making approval easier if you have health conditions that might disqualify you from buying a traditional life insurance policy.
How much does credit life insurance cost?
The premiums on a credit life policy depend on the size and type of loan you’ve taken out. Bigger loans will translate to higher premiums and vice versa.
However, credit life premiums are typically higher than rates for a comparable term life policy. That’s because of the lack of a medical exam — without evaluating your health, the insurance company is taking on more risk by insuring you.
Who should get credit life insurance?
Credit life insurance protects your estate, co-signers of the loan, and your spouse (if you live in a community property state) from being responsible for your debt when you die.
If you have debts that might outlive you — and you don’t qualify for term or permanent life insurance — a credit life policy is worth exploring.
But if you do meet underwriting standards for traditional life insurance, you’ll get more value for your money by purchasing a standard policy. It will pay out directly to your loved ones and can finance more than debt repayment. Also consider the other alternatives for loan repayment.
“It’s important to understand how loan insurance works,” says 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.”
Choosing the best option
For the average person, a credit life policy simply doesn’t offer as much value as traditional life insurance. 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.
Frequently asked questions
Who owns a credit life insurance policy?
You own your credit life insurance policy, but the lender is the beneficiary.
What are the disadvantages of a credit life insurance policy?
A credit life insurance policy usually covers only one loan. You continue to pay the same premium even as the death benefit shrinks, and only your lender gets a payout when you die. Premiums are generally more expensive than a comparable term life insurance policy.
Is credit life insurance a good deal for consumers?
A credit life policy doesn’t make sense for most consumers, 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, it makes sense to consider credit life coverage.
