What Is Credit Life Insurance?

Credit life insurance

Have you ever borrowed money to buy a house or a car? You were probably offered credit life insurance. Credit life insurance is an insurance policy that pays off a loan in the event that the borrower passes away. Lenders usually offer it for home mortgages, car loans, and student loans. You can sometimes get it with regular personal loans, too.

It is beneficial for some, and an unnecessary cost for others. However, if you’re thinking about buying it, here’s what you should know first.

How credit life insurance works

Despite the name, it doesn’t work like regular life insurance. If you’re paying off a loan and you unexpectedly pass away during the repayment period, it will automatically pay off the remaining balance.

In this case, your lender works with the insurance provider to get the money back. There is no penalty to your next of kin. Also, when you buy it, you get guaranteed coverage. Meaning, you don’t need to take a medical exam—or even answer any medical questions—to get this type of coverage.

Because it is not medically underwritten, it’s more expensive than traditional life insurance policies. The cost of it depends on how much money you borrow and other coverage details.

Is credit life insurance a requirement?

Credit life insurance is always optional. When you borrow money, your lender cannot require you to buy it. However, declining it can put your spouse or joint borrower at risk to assume your debt if something were to happen to you.

Who needs credit life insurance?

Credit life insurance is not incredibly common, and many borrowers view it as an added expense that is not worth a higher monthly payment. But in reality, it can be beneficial in some situations, because the unexpected can and does occur.

For example, a loan is not always forgiven when you die. As a result, it can be particularly beneficial for borrowers who do not want to burden their loved ones with loan payments if they were to pass away.

It can also be a good choice if a family member or friend has co-signed a loan with you. If you passed away, that co-signer then becomes responsible for the unpaid balance on the loan. However, with credit life insurance, the co-signer does not take over the payments.

When deciding whether to purchase it, also think about where you live. If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, you live in a community property state.

This basically mean married couples equally own any assets and owe any debts, regardless of who earns or spends the income. For married individuals, your spouse is responsible for your debts in the event of your death. Credit life insurance can pay off the balance of a loan so your spouse doesn’t have to.

Pros of credit life insurance

Credit life insurance offers a few advantages that may be enticing to certain borrowers. Some of the biggest benefits include:

Peace of mind

The main reason to get this type of insurance is to protect your loved ones from assuming your loan debt if you unexpectedly pass away. This provides peace of mind for you, and for them.

This is also especially important if you are the breadwinner of the household because the debt could become a big financial burden to the ones you leave behind.

No medical exam

Anyone can automatically qualify for credit life insurance because there is no medical exam and no health questions asked. That’s an important advantage if you have health problems or pre-existing conditions that could make it difficult or expensive for you to buy other types of life insurance.

Easy monthly payments

Lenders can have your premium included in your monthly loan payment. That makes it convenient for you because there is no separate insurance payment to make each month.

Cons of credit life insurance

Credit life insurance has several notable disadvantages. Before you choose to purchase this type of coverage, it’s important to think about what potential downsides it has. Here are some of the cons to consider before purchasing it:

More expensive than other forms of life insurance

With a credit life insurance policy, any borrower qualifies for coverage. That’s good news for borrowers with health conditions, but that means the cost of it is typically more expensive than other types of life insurance.

Your loan amount decreases but your premiums don’t

Credit life insurance premiums stay the same until your loan is paid off. Therefore, you pay the same amount each month even though your loan balance decreases every month.

It only pays off the loan if you pass away

The only time credit life insurance applies is if you pass away during the repayment period. If you lose your job or become disabled and are unable to work, this policy doesn’t apply.

However, there are other types of credit insurance that will cover your loan payments in these circumstances, such as credit disability insurance. This type of disability insurance helps to cover your loan payments if you become disabled and are out of work with limited income.

Do I need credit life insurance if I have traditional life insurance?

Credit life insurance and traditional life insurance, like term life or whole life, are completely different, but they serve a similar purpose—to provide financial protection in the event of your death.

Credit life insurance will specifically pay off your loan if you pass away. With traditional life insurance, your beneficiary (typically a family member) receives a fixed amount of money after you pass away, called a death benefit. The beneficiary does not pay taxes on the money, and it can be used for any purpose.

If you were to pass away with outstanding debt, your beneficiary could use the money from your life insurance policy to repay the loan if they took over your payments. However, that would lessen the amount of money available to use for other necessary expenses, like funeral costs or income replacement.

Ultimately, credit life insurance does not replace traditional life insurance. If you already have regular life insurance, credit life insurance is still worth considering. This is especially true depending on how much life insurance coverage you have, and the size of the loan you need to repay.

Consider credit life insurance if it’s right for you

If you borrow money and have the opportunity to buy credit life insurance, think about the pros and cons of this type of insurance. It can be a good option if you want to protect your survivors from your financial burdens in the event of your death.

However, keep in mind that it can be more expensive than other types of life insurance. Plus, you won’t get any protection if you become unable to make the payments, such as in the event that you become disabled.

If you don’t already have regular life insurance, it might be worth purchasing a policy with enough coverage to satisfy your loan in the event of your death. That way, your loved ones won’t have to use their own savings to repay what you still owe.

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