These days, there’s so many forms of life insurance on the market that it’s easy to get overwhelmed. And even more so with a product like credit life insurance that doesn’t function the same way as typical life insurance.
Credit life insurance essentially benefits the lender, not the borrower. But in a roundabout way, it does benefit the borrower and their loved ones should they pass away unexpectedly. After all, no one wants to leave their debts to their family, and credit life insurance can help you avoid that in a seamless way so that all loose ends are tied up after your death.
Interested? Keep reading for a full guide to credit life insurance, including the advantages, alternatives and cost so that you can decide if it’s right for you.
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Credit life insurance can be a confusing term, but it’s not actually life insurance. Instead, it’s a form of insurance that covers loans or debts. It can be considered a form of guaranteed issue life insurance, because there’s no medical exam or health questionnaire to qualify; anyone with a loan that wants credit life insurance can get it.
Credit life insurance isn’t required. In fact, it’s against the law for lenders to require loan insurance. However, it can give peace of mind to those with large loans, like a home or car.
Credit life insurance is fairly straightforward. If you have a large loan and you want to ensure payments don’t get passed to your loved ones should you pass away before it’s paid off, you can take out credit life insurance. You’ll pay a premium, calculated based on the value of the loan, that’s typically rolled into the loan payment itself.
Over time, as the loan value decreases, so will your premiums and the face value of the loan, until there’s no loan left (and no insurance policy). If you pass away while there’s an outstanding balance on your loan, the insurance pays off the outstanding balance. The payment goes directly to the lender. The title of the asset is then given to your beneficiaries as the asset is now owned in full by you (through your beneficiaries).
It’s worthwhile to note that credit life insurance has no tax implications. Because the insurance payment goes directly to the lender, the beneficiaries don’t have to pay any taxes on the payout.
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The main benefit of credit life insurance should be clear by now: your outstanding debt is paid out should you pass away, so your loved ones aren’t burdened with the payments. But when you consider the fact that in the U.S. your loved ones don’t typically inherit your debts, why consider credit life insurance?
It’s designed to ensure that your survivors get the asset that you took out a loan for, such as a home, boat or car, without having to finish the payments on it. The loan is immediately paid off and the title gets transferred to your loved ones. Otherwise, if your loved ones could not continue payments, the asset would be forfeit.
Another main benefit to credit life insurance is that it does offer this protection without any medical exam or health assessment. You can’t be denied coverage, even if you have a pre-existing health condition, you’re older, or you aren’t in good health.
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There are many products out there that help protect your loved ones from financial struggle should you happen to pass away. If you’re considering credit life insurance but aren’t sure if it’s the right fit, here are some alternatives that might work for you as well:
Again, credit life insurance is entirely optional. You should only choose it if it makes sense for you. Many people take out loans and don’t insure them; either their loved ones continue with the payments in order to eventually own the asset, or the asset is forfeited back to the lender.
If your main goal is to ensure your family doesn’t get stuck with payments, then credit life insurance or any of the alternatives above can help you make that happen. You can also use this life insurance calculator to figure out if credit life insurance is enough, or if you might need a larger policy to protect your family should you pass away.
Of course, cost is going to play a large role in figuring out if credit life insurance is right for you. And while we’d love to give you an average cost to help you sort that out, the fact of the matter is that an average cost doesn’t exist.
This is because the cost of credit life insurance depends entirely on the value of the loan. Premiums are determined based on the loan total and usually worked into your monthly payment. You might have a loan for $250,000 for a home or for $10,000 for a car; the payments between these two will vary significantly.
If you’re interested in credit life insurance and want to get a sense of the cost, speak to the lender of your loan or to an insurance agent today. They can help you determine if the cost and plan makes sense for you. Reach out today to start understanding your options.
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We’d love to finish off by answering “yes” or “no” to this question, but the truth is that no one can answer this for you. It really depends on your unique situation, including the loan value, your finances, your family, and more.
What we can say is that exploring your options and thinking ahead is always a good idea. Credit life insurance is one option when it comes to paying off your debt or planning for your loved ones, but it’s not the only option. If you think credit life insurance might be right for you, you can start by getting access to free quotes here, or you can simply talk through alternatives with a qualified, helpful insurance agent.
When it matters, we’ve got you covered.
Jessica Fox Jessica Fox has been a freelance writer for five years, with a specialty in health, wellness, and insurance. During this time, she’s written for some of the biggest B2B and B2C brands from around the world. Jessica is also the mother of two young daughters and loves coffee, writing, and working out.
