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What Is Credit Life Insurance, and Are You Really Needing It?

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What Is Credit Life Insurance, and Do You Need It?

Credit life insurance could pay off your loan if you die. But coverage is often not necessary.

By Georgia Rose Lead Writer | Science, technology, insurance Georgia Rose is a lead writer at NerdWallet and is responsible for the writing of content related to life insurance. Through her professional work, Georgia has written on various topics such as personal finance, government policy as well as science and technology. She loves researching complicated topics and distilling information to her readers.

Jun 29, 2020

Written by Lisa Green Assigning Editor | Insurance, data journalism Lisa Green was an insurance writer at NerdWallet prior to being made editor. Prior to that, she worked for over 20 years working as editor for The Tennessean in Nashville, in which she was a part of the 2011 Pulitzer Prize finalist team. Her work has won awards from the Society of American Business Editors and Writers and Investigatory Reporters and Editors, and the Society of Professional Journalists.

Many or all of the products we feature are provided by our partners, who we pay. This influences which products we review and the location and manner in which the product is featured on a page. However, this does not affect our assessments. Our views are our own. Here’s a list and .

There’s a certain amount of risk involved when you take out an loan in particular when you’re borrowing lots of money. The idea of preventing others from taking on the burden of your debts in the event that you pass away is a normal worry. But, debts aren’t often inherited, which means your loved ones probably won’t be responsible for your loan.

In certain situations, however, your debt can have an adverse impact on the ones that you pass on. Credit life insurance helps lessen these risks by paying back the lender if you die without paying back the loan. But , this kind of insurance isn’t required in all circumstances and is often very costly. Before buying an insurance policy, think about the cost and look into alternatives like term life insurance, which usually provides the same protection for less.

What is credit life insurance?

Credit life insurance covers your loan in the event that you die prior to paying off the debt. The value of the policy is linked to loan amount. As you pay off the debt, the insurance amount decreases. If you die prior to paying off the loan, the insurer repays the balance of the loan.

The credit life insurance policy doesn’t provide protection to you, but it does protect the lender. Your rates remain the same for the duration of the policy regardless of whether or not the loan becomes. In most cases, lenders are the beneficiaries of credit , meaning the money is paid directly to them and not to your heirsin the event of your death.

Credit insurance: types

The credit life insurance policy is specific type of insurance that pays in the event of your death. Other kinds of credit insurance are able to repay loans in less severe circumstances, such as involuntary unemployment, disability, theft or the destruction or loss of your personal belongings, or time off.

What does credit life insurance provide?

Credit life insurance is a way to cover mortgages, auto loans, education loans as well as bank credit loans or other types of loans. In general it’s insurance can’t be more than what you are owed for the loan.

The state you live in may establish the maximum coverage limits for credit life insurance policies. For example, the credit life insurance policy for mortgages in New York typically can’t exceed $220,000. So, if your mortgage is worth $440,000, your mortgage insurance may only cover half of the loan.

In generally the case, credit life insurance is provided by lenders or banks when you take out a loan. However, you’re generally not required to purchase coverage if you don’t wish to purchase it. Indeed, loan providers can’t reject a loan application due to the borrower’s inability to buy credit insurance, according to the Federal Trade Commission. It’s also illegal for lenders to include credit insurance without your knowledge or your consent.

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Alternatives to life insurance with credit

When shopping for loan insurance Credit life isn’t the only choice. Consider the following alternatives before purchasing the policy.

Credit life insurance vs. Life insurance with a term

Standard will be used to pay off your loans when you die It’s usually cheaper in comparison to credit life insurance, and is more flexible. The death benefit stays constant throughout the term of the policy and pays in regardless of loan amount.

Also, you can for your term insurance. This means your heirs — not the lender -will receive the funds, no matter how much in you’ve paid off the loan you’ve paid back, and they can utilize the funds for any purpose.

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Life insurance policy policies that are in force

Instead of purchasing more insurance instead, you could take advantage of your already existing permanent or term life insurance policy to protect the costs of a loan. Be aware that lenders might need to see proof of insurance coverage prior to approving the loan. Make sure that you’re comfortable allocating some of the funds from your existing policy to fund the loan particularly when you purchased the policy in order to cover specific expenses.

Traditional savings account

Savings or investment accounts can provide a valuable financial safety net. If the money saved in the savings accounts can help cover any outstanding debts that you have after your death or pass away, you might not require insurance.

Is credit life insurance the right choice for you?

There’s a good chance that you don’t require the insurance for credit life if your primary problem is debt inheritance. That’s because your debt rarely is passed to your heirs once you pass away. Instead, your estate settles your debts using your assets. If you don’t have enough funds to cover what you owe the debt, it is usually unpaid, and family members are not required to pay it.

There are occasions when an outstanding loan can have a negative impact on an estate’s planning. Life insurance can be beneficial in the following scenarios:

Your estate shouldn’t be used to cover your obligations. If you pass away and you’re not able to pay back the loan, the property that you borrowed money to purchase -for example, houses or cars- may be sold to repay the lender. This could reduce the amount left to your inheritors. Loan insurance covers any outstanding dues if you die, keeping the debt from your estate.

You should protect co-signers. If you are co-signers, you’re both in charge of the debt. Credit life insurance covers any outstanding debt in the event that you die, removing the obligation from any remaining co-signers.

If you live in a community property state and want to safeguard your spouse. In states with community property laws your assets — and your obligations typically transfer over to the spouse. Credit life insurance pays off the loan so your spouse doesn’t need to. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are states with community property laws.

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How much does credit Life insurance price?

The premiums for credit life insurance vary across states and are dependent on the amount and the kind of loan. Costs can be more than other life insurance policies due to two main elements:

The coverage is usually guaranteed no matter what your medical condition is. As with most policies, insurers generally charge higher premiums when they don’t know your medical history as the risk to insure you is increased. The majority of Credit life policies can be guaranteed. Your health, age and employment status may impact your ability to qualify.

Some lenders will roll in insurance costs into their loan payment. This may sound like a good idea, but it can end up costing you more. You’re taking out loans to cover your insurance premiums, which increases the amount you pay for interest.

Below are some sample annual rates for $50,000 terms and life assurance policies with credit for people healthy and in good health according to data from the .

Age

Credit life

Term life

30

$370

$78

40

$370

$92

50

$370

$163

60

$370

$321

Can you cancel credit life insurance?

It is possible to cancel your insurance and get a refund of your premiums if you need to cancel your loan life insurance contract earlier. But, cancellation rules differ between lenders. The option to cancel your policy can be beneficial if you are paying off most part of the loan and don’t wish to pay the higher price for less protection.

Before you purchase a policy, ask whether you can cancel coverage early and what refund policy, if any, is offered.

About the writer: Georgia Rose is a lead writer for NerdWallet and oversees our articles on buying life insurance. She has had her work published on The New York Times, The Washington Post, The Independent and ABC News.

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