Credit Life Insurance: Who, What, And How To Purchase

Credit life insurance is a type of insurance that pays off a borrower's outstanding debts if they die. It is typically used to cover large loans, such as a mortgage or car loan, and the policy amount decreases as the loan is paid off. Credit life insurance can be purchased in two ways: as a single premium added to the loan principal or as monthly payments based on the outstanding balance. While credit life insurance is not required by law, it can provide peace of mind and protect loved ones from the burden of loan payments in the event of the policyholder's death.

Credit life insurance can be purchased from banks or lenders

Credit life insurance is a type of insurance that pays off a borrower's outstanding debts if they die. It is typically used to cover large loans, such as mortgages or car loans. The policy pays off the loan in the event of the borrower's death, protecting any co-signers from having to make loan payments.

If you decide to purchase credit life insurance, there are two main ways to structure the payments:

• Single premium: The cost of the policy is added to your loan principal, and you pay interest on the total borrowed amount, including the premium.
• Monthly outstanding balance: Premiums are paid monthly, either as fixed installments or payments that vary depending on your balance.

It is important to note that credit life insurance is generally more expensive than traditional life insurance and has fewer benefits. The payout from a credit life insurance policy goes directly to the lender, not to your family or chosen beneficiaries. Therefore, it is essential to consider your needs, compare rates and coverage amounts, and evaluate any limits or exclusions before purchasing credit life insurance.

It's an optional coverage

Credit life insurance is an optional coverage that you can purchase to protect your loved ones from having to pay off your debts after your death. It is a type of life insurance policy that is designed to pay off your outstanding debts if you, the policyholder, die. It is typically used for large loans, such as a mortgage or car loan, and the payout goes directly to the lender to settle the debt. While it is not required by law, credit life insurance can be a valuable tool to ensure your family is not burdened with debt in the event of your untimely death.

One of the main advantages of credit life insurance is that it offers peace of mind by ensuring your debts will be taken care of. It can also protect your heirs or co-signers from being saddled with loan payments, allowing them to keep your shared assets, such as a house or car. Additionally, credit life insurance is often a guaranteed issue policy, meaning you won't have to undergo a health exam to qualify for coverage. This can be especially beneficial for older adults or individuals with health conditions that may make it difficult to obtain traditional life insurance.

However, there are also some disadvantages to consider. Credit life insurance can be more expensive compared to other types of life insurance policies, and the premiums may be added to your loan balance, increasing your overall costs. Additionally, the payout of a credit life insurance policy goes directly to the lender, rather than your chosen beneficiaries, which limits the flexibility of how the money is used.

When deciding if credit life insurance is right for you, it's important to weigh your needs, options, and costs. Review any existing coverage you may have, such as term or whole life insurance policies, and compare their rates and coverage amounts to those of credit life insurance. Consider the limits and exclusions of credit life insurance policies, such as whether they will cover the total debt balance or only the minimum monthly payments. Additionally, evaluate your overall financial picture and consider if you have debts beyond a single loan, as term life insurance may provide more comprehensive coverage at a better price.

The cost of the policy is added to the loan principal

If you choose to buy credit life insurance, you can do so by adding the cost of the policy to your loan principal. This is known as a "single premium" purchase, where the full premium is calculated upfront and added to your loan amount. You will then pay interest on what you borrow, including the premium. This means that the credit life premium incrementally adds to the interest charges.

For example, if you take out a loan of $10,000 and the credit life insurance policy costs $500, you will be taking out a loan of $10,500 in total, and the interest will be calculated based on this new amount. This option can be beneficial if you want to include the cost of insurance in your loan and pay it off over time.

It's important to note that adding the cost of the policy to your loan principal will result in higher interest charges over the long term. The interest is calculated on the total loan amount, including the premium. This means that you will be paying interest on the cost of the insurance policy as well as the loan itself.

Additionally, if you decide to cancel the credit life insurance policy, the coverage you don't use may be refunded. However, the refund process can vary, and it's essential to review the specific terms and conditions of your policy.

When considering credit life insurance, it's crucial to compare it with other options, such as traditional life insurance, to ensure you make the best decision for your needs.

It's a guaranteed issue policy, so no medical exam is required

Credit life insurance is a type of insurance policy that pays off a borrower's debts if they die. It is typically used for large loans, such as mortgages or car loans. The payout from a credit life insurance policy goes directly to the lender, rather than the borrower's beneficiaries, and the death benefit decreases as the policyholder's debt decreases.

Credit life insurance is often a guaranteed issue policy, meaning that it is available to anyone, regardless of their health history. As a result, no medical exam is required to qualify for coverage. This makes it a convenient option for older adults or those with severe health issues who may otherwise struggle to get life insurance. However, guaranteed issue policies tend to be more expensive than other options if you are in good health. They also usually offer lower coverage amounts.

Credit life insurance can be purchased from a bank or lender when taking out a loan or credit line. It is always voluntary and lenders may not require it or base their lending decisions on whether or not you accept it. Premiums can be paid as a single premium, where the cost of the policy is added to the loan principal, or in monthly instalments.

It's more expensive than traditional life insurance

Credit life insurance is often more expensive than traditional life insurance. This is because credit life insurance is a guaranteed issue policy, meaning it covers you regardless of your health status. This makes credit life policies a greater risk for insurance companies. Traditional life insurance, on the other hand, usually considers your health, so if your medical evaluation finds you healthy, you will receive lower rates as you pose less risk.

The higher cost of credit life insurance is reflected in the difference in premiums between the two types of policies. For example, the Wisconsin Department of Financial Institutions estimates that a $50,000 credit life insurance policy costs $370 annually. In comparison, a $500,000, 30-year term life insurance policy for a healthy 30-year-old female would cost around $336 annually. This is a significant difference in cost for a much higher level of coverage.

In addition to the higher cost of credit life insurance, it is important to consider the lack of flexibility associated with this type of policy. Credit life insurance is designed to pay off a specific debt balance, and the payout goes directly to the lender. Traditional life insurance, on the other hand, provides a death benefit that goes to your chosen beneficiaries, who can use the funds as they see fit. This flexibility is not available with credit life insurance.

Another factor to consider is that credit life insurance may be built into a loan, which would increase your monthly payments. This is something that traditional life insurance does not typically do. Overall, it is important to carefully consider the costs and benefits of both credit life insurance and traditional life insurance before making a decision. While credit life insurance may be appealing due to its guaranteed issue nature, it is important to weigh this against the higher costs and lack of flexibility that come with this type of policy.

Frequently asked questions