What are you leaving behind for the ones you love? Are you leaving mounds of debt? Are you afraid of taking out a loan because you don’t want to burden your loved ones when you pass? There is help out there if you are worried about leaving behind debt, and it is in the form of credit life insurance.
Although debts are seldom inherited, it does happen, and you want to protect your loved ones from that. We will look at credit life insurance, how it works, what credit life insurance covers, and the average cost of credit life insurance.
- What is Credit Life Insurance?
- How Credit Life Insurance Works
- What Does it Cover?
- How Much Does it Cost?
- Do you Really Need Credit Life Insurance?
What is Credit Life Insurance?
Credit life insurance is a type of insurance specifically designed to pay off your loan if you die unexpectedly and before getting the loan paid off. The amount of coverage is directly related to the amount borrowed. As you pay off your loan, your coverage amount decreases. If you die before you have paid off your loan, insurance will pay the remaining portion of your loan. The credit life insurance policy will decrease in death benefit proportionally as you pay off your loan until both balances reach zero.
The purpose of credit life insurance is so that you do not leave behind outstanding debts for your loved ones. Keep in mind, it is not legal for people to inherit debts in most states, with the exception being states that recognize community property where a spouse can inherit a debt. Only a spouse can inherit debt, not children, or any other relation. However, that also does not mean that a debt is forgiven upon death. A bank may not hold an heir liable for payment, but they could also repossess an asset. Credit life insurance is still important because it allows heirs to inherit the asset free and clear of any remaining debt.
What Is It Not?
Credit life insurance is not a life insurance policy that pays out a sum of money after death to family beneficiaries. It is designed to pay directly to the creditor or lender of the loan. The difference between traditional life insurance and credit life insurance can be confusing because they are almost the same product, with the main differences being who receives the money once the owner of the coverage dies and the fact that the death benefit decreases over time. Because the face amount drops over time, credit life insurance policy is also called a decreasing face policy or modified coverage life insurance.
A downside of credit life insurance is that your premium will remain level no matter how low your loan balance gets. The upside is that it may be less expensive than a comparable level term policy, given the starting death benefit. Ultimately, it protects the lender, not you. It will also protect your loved ones so they will not have to struggle to pay off your debt if they want to keep the asset with the debt.
How Does Credit Life Insurance Work?
Credit life insurance is a product offered when you take out a loan of any kind. This loan could be a mortgage, auto loan, or a line of credit. Many policies are offered and sold by the bank but can also be purchased through traditional life insurance companies. Like other insurance policies, you pay a premium, generally attached to your monthly loan payment if purchased through the bank. The amount of insurance can not be more than the loan amount, and some states set maximum coverage limits.
The idea behind the credit life insurance is to protect your heirs if you die. They will pay off the loan. Once the loan is paid off, the title to the home or vehicle will be transferred to a beneficiary. If you have a co-signer for this loan, the credit life insurance will protect the co-signer, and he/she will not have to make the rest of the payments. This is beneficial if you are the one in the family who brings home the most money. If the co-signer can not make the payments without you, credit life insurance will help pick up the pieces.
As mentioned before, debts are not generally inherited. The exception to this is the states that recognize community property. Your spouse becomes responsible for your debts; however, your children do not. But like we mentioned, this does not mean they will inherit the home or car debt-free since the bank could repossess the asset or require that payments continue on the loan.
Unlike regular life insurance, credit life insurance has fewer underwriting requirements if you want to purchase it. You don’t have to pass a physical or qualify based on health. No medical exam is needed.
What Does Credit Life Insurance Cover?
Credit life insurance covers a joint borrower or heirs so that they do not need to pay off a loan if the borrowing dies. As mentioned earlier, when you have a joint borrower on the loan, credit life insurance will pay off the loan at the time of your death so the joint borrower does not have to continue making payments. Debts are not generally inherited though, so it is seldom needed for heirs.
If you’re concerned about protecting your spouse or joint borrower, it might be more appropriate to purchase a term life insurance policy so they can receive the tax-free money and pay off the debt with that and have extras for other necessities like funeral costs and living expenses while mourning. We typically recommend a level term policy to our clients in this situation.
Credit life insurance will cover a wide range of loans, including mortgages, auto loans, education loans, bank credit loans, and other types. It is normally available through banks and lenders.
Not Required by Lenders
Credit life insurance is not required when taking out a loan. According to the Federal Trades Commission, it is illegal for a lender to reject a loan application due to not purchasing credit life insurance. However, sometimes credit life insurance is added into the loan making your payments higher. Be sure to talk to your lender to see if this hidden insurance is included.
The Average Cost of Credit Life Insurance
Like other insurance coverage, credit life insurance premiums are different state to state. Also, the premiums differ based on the amount borrowed, type of loan, type of credit, and type of policy. Credit life insurance can be more expensive than other types of life insurance.
Why Is It More Expensive?
Credit life insurance is more expensive for two reasons. The first reason is that the coverage is assured. As mentioned before, there is no medical exam needed, and you can get coverage despite your health. This makes lenders charge higher premiums because they do not know medical history. The risk is greater if they do not know health status. Other things that affect assured coverage are age, health, and employment status. It is similar to a guaranteed issue life insurance product in this way, which is also more expensive than a traditional policy.
Credit life insurance is expensive because credit life insurance can be rolled into your monthly loan payment and people may not notice the additional cost. It will cost you more when you don’t realize how much you are paying. Broken down, you are paying more for your credit line insurance because you pay interest on the insurance when added into the monthly payment.
Credit Life Insurance Costs
Credit life insurance costs three-four times more than term life insurance. The sample rates for a $50,000 policy for a 30-year-old is $370 for credit life insurance. It is $78 for term life insurance with the same parameters. Another example is a $50,000 policy for a 60-year-old who is $370 for credit life insurance. It is $321 for a term life insurance with the same parameters. Because it is so much more expensive, it makes more sense for most people to just buy a regular term life insurance policy and get to keep the extra coverage as the loan is paid down.
Do I Need Credit Life Insurance?
You may need credit life insurance if you don’t want your term life insurance or estate to pay your debts. The credit limit insurance would pay off your loan directly. Another reason you may need credit life insurance is that you want to protect co-signers. As mentioned earlier, co-signers will not have to finish making loan payments if you die if you have credit life insurance. Finally, you may need credit life insurance if you live in a state that is a community property state and want to protect your spouse. Living in a state that is a community property state is the only time credit life insurance is required and can be required by law.
All-In-All
All-in-all, credit life insurance pays off a loan after you die, preventing that debt from being inherited by a spouse or children. It is only required when living in a community property state, and it generally costs three to four times more than a term life insurance policy. However, it is easier to obtain than a term life insurance policy as no medical exam is needed. Depending on your lender and policy information, you may be able to cancel your credit life insurance and receive a refund on your premiums if you cancel early. This might be beneficial if you pay off most of the loan and don’t want to continue paying the high premium. Ask your lender before you purchase the policy to see if this is a possibility.
Outside Sources:
https://www.investopedia.com/terms/c/credit_life_insurance.asp#:~:text=Credit%20life%20insurance%20is%20a,until%20both%20reach%20zero%20value.
https://www.bankrate.com/insurance/life-insurance/credit-life-insurance/
https://www.nerdwallet.com/article/insurance/credit-life-insurance
