A life insurance policy protects your loved ones not just from the loss of your income, but from taking on your unpaid debts when you die. Credit life insurance is a type of policy tied to a single debt, such as a mortgage or business loan. Your lender is the sole beneficiary of the policy and the death benefit only covers the loan in question.
While a credit life policy 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.
What is credit life insurance?
Credit life insurance ensures your debts are paid even if you pass away unexpectedly. You’re guaranteed approval and as you pay down your loan, the death benefit of your policy decreases. If you die while the policy is in force, your insurance provider pays the 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 uses of a credit life policy.
How does credit life coverage work?
You're often given the option to buy credit life coverage when taking out an installment loan or large line of credit, like a home or business loan. Because credit life policies are generally purchased alongside a loan and sold by your lender, premiums are usually priced into 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?
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,” 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.”
For the average person, a credit life policy’s limitations won’t outweigh the benefits 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.
Frequently asked questions
Who owns a credit life insurance policy?
You are the owner of your credit life policy, but the policy’s beneficiary is your lender, rather than beneficiaries of your choosing.
What are the disadvantages of a credit life insurance policy?
The downside of credit life policy is that it's usually only good for one loan. That means you pay the same premium even as the death benefit shrinks and only your lender gets a payout when you die.
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, then you may consider credit life coverage.