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

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What is Credit Life Insurance, and Do You Really Need It?

Credit life insurance can be used to pay off your loan in the event of your death. But coverage is often not necessary.

By Georgia Rose Lead Writer | Science, technology, and insurance Georgia Rose is a lead writer for NerdWallet and manages the content for life insurance. Through her professional career, Georgia has written on various topics, such as personal finance, government policy as well as science and technology. She enjoys researching complex topics and distilling the information for her readers.

Jun 29, 2020

Editor: Lisa Green Assigning Editor | Data journalism, insurance Lisa Green was an insurance writer at NerdWallet before being promoted to editor. Prior to that, she worked for twenty years in the role of editor for The Tennessean in Nashville, in which she was a part of a 2012 Pulitzer Prize finalist team. Her work has earned her accolades by the Society of American Business Editors and Writers, Investigatory Reporters and Editors and the Society of Professional Journalists.

The majority or all of the products we feature are provided by our partners who compensate us. This affects the products we write about and where and how the product appears on a page. However, this does not affect our assessments. Our opinions are entirely our own. Here’s a list and .

There’s a degree of risk involved when you take out an loan particularly in the event that you’re borrowing a large amount of money. Protecting others from shouldering your debts should you die can be a natural concern. But, debts aren’t often passed down through the generations, so your family members won’t be liable for the loan.

In some situations, though, your debt can have negative consequences for the people that you pass on. Credit life insurance reduces these risks by repaying the lender in the event of your death before paying off the loan. But this type of insurance isn’t necessary in all cases and it can be costly. Before buying an insurance policy, think about the cost and look into other options like term life insurance, which typically offers the same type of protection for less.

What is credit life insurance?

Credit life insurance pays off the loan if you die before making payment on the debt. The policy’s face value is linked to loan amount; as you pay off the debt, the coverage amount decreases. If you pass away before making payments on the loan, the insurer repays the remainder of the debt.

Credit life insurance doesn’t really safeguard you in the same way as it does protect the lender. Your premiums stay the same for the duration of the policy , regardless of whether or not the loan grows. And lenders are almost always the beneficiary of credit , meaning that the cash payout is made directly to them and not to your heirs -should you pass away.

Types of credit insurance

The credit life insurance policy is particular kind of insurance that pays when you die. Other types of credit insurance are able to repay loans in less severe circumstances, such as voluntary unemployment disability, disability, theft, destruction of personal property, or time off.

What does credit life insurance protect?

Credit life insurance may be used to cover auto loans and education loans as well as bank credit loans and various other loans. In general it’s insurance can’t be more than what you are owed on the loan.

Your state can set maximum coverage limits on credit life insurance policy. For instance, the credit life insurance policy for loans in New York typically can’t exceed $220,000. Therefore, if your mortgage is valued at $440,000, the credit life insurance policy could only provide half the loan.

In generally credit life insurance, it’s offered by lenders or banks when you make a loan. But you’re not typically required to buy insurance if you do not want it. In fact, lenders aren’t able to refuse a loan application due to the borrower’s inability to buy optional credit insurance, according to the Federal Trade Commission. It’s also illegal for lenders to add credit insurance without your knowledge or consent.

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Alternatives to credit life insurance

If you’re looking for loan insurance, credit life isn’t your only choice. Consider the following alternatives before buying a policy.

Credit life insurance is different from. the term insurance

Standard is able to be used to pay off your loans in the event of your death It’s usually cheaper in comparison to credit life insurance, and is more flexible. The death benefit remains the same for the duration of the policy and is paid out regardless of the loan amount.

You can also use your term policy. That means that your heirs- not the lender -will receive the funds regardless of the amount of your loan you’ve paid back, and they can utilize the funds for whatever purpose they choose.

Find the right life insurance plan that is right for you.

Make sure you and your loved ones are covered by comparing the most customized life insurance quotes offered by our partners.

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Life insurance policy policies that are in force

Instead of buying more coverage it is possible to take advantage of your existing term or permanent insurance policy to pay for the cost of a loan. Remember that lenders might need to verify coverage before proceeding. Be sure that you’re comfortable allocating certain funds from the policy you have in place to fund the loan particularly when you purchased the policy in order to cover specific costs.

Traditional savings account

Savings or investment accounts are a good security net for your financial. If the money that are in savings are able to 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 credit life insurance if the only concern is debt inheritance. It’s because the debt you owe rarely will be handed over to your heirs after you pass away. Instead, your estate settles your debts using your assets. If you do not have enough money to pay what you owe the debt, it is usually unpaid, and family members are not obliged to settle it.

There are occasions when an outstanding loan can affect an estate’s planning. Life insurance can be beneficial for the following situations:

Your estate doesn’t need to pay your debts. If you pass away or pass away, the item you borrowed money for –like houses or cars- may be sold in order to pay the lender. This could decrease the amount left to your descendants. Insurance for loans covers outstanding payment if you pass away leaving the debt from your estate.

It is important to safeguard co-signers. If you are co-signers, you’re both responsible for the debt. Credit life insurance covers any outstanding debt in the event that you die, removing the responsibility from the surviving co-signers.

You live in a community property state and want to safeguard your spouse. In states with community property laws, your assets — and your debts — typically pass onto your partner. Credit life insurance helps pay off the loan so your spouse doesn’t have 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 term life insurance costs?

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

The coverage is usually guaranteed whatever your condition. Like most policies, insurance companies typically charge higher premiums in the absence of a medical history as the risk of insuring you is increased. The majority of credit life insurance policies are guaranteed. Your age, health and job status could affect your insurance coverage.

Some lenders will roll in insurance costs into their loan payment. This might sound to be a smart idea, but it can end up costing you more. It’s basically taking out loans to cover for your insurance premiums. This will raise the amount you pay for interest.

Below are the annual rates for $50,000 terms and life assurance policies with credit for a person who is healthy Based on information 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 receive a refund on the premiums if you have to cancel your loan life insurance contract early. However, cancellation policies vary between lenders. The ability to cancel your insurance policy may be beneficial if you are paying the majority part of the loan and don’t want to continue paying the high premium for less coverage.

Before you purchase an insurance policy, make sure you know if you are able to cancel the policy 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 highlighted in The New York Times, The Washington Post, The Independent and ABC News.

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