In certain situations, your debt can have a bad impact on the family you leave behind when you pass away. This is where credit life insurance comes in. Credit life insurance helps reduce the risks by paying back your loan if you pass away before repaying it.
If you have a personal loan, auto loan, or mortgage, you may have been offered this policy by your lender. Credit life insurance is different from traditional life insurance. It helps pay off your debt balance if you pass away.
However, you need to know that this type of policy is not always needed. When there are lots of options, credit life insurance may not be the right solution for your problem. Before purchasing a policy, consider different alternatives that offer similar protection at an affordable price.
What is Credit Life Insurance?
Just like I have mentioned above, credit life insurance is a very unique kind of life insurance meant to cover your remaining debt. When you take out a personal loan, mortgage, car loan, or line of credit, your lender may suggest this insurance to you. If you purchase this insurance, the lender or bank receives the payout, not your family or beneficiaries. This helps to protect the lender’s money.
Some credit life policies are linked to the remaining debt; as you pay down your debt, the insurance coverage decreases. If you die, the insurance pays off what’s remaining on the loan. Other policies keep the same payout amount throughout the policy term, but these usually cost more.
How Does It work?
Credit life insurance is a type of guaranteed-issue life insurance policy. This means you can be approved for coverage regardless of your health condition. Costs depend on factors such as credit balance, credit, and many more. You can purchase this policy in two different ways.
- Based on your monthly outstanding balances, the payment depends on what is remaining on the loan.
- Based on a single premium purchase, the whole premium gets calculated upfront and added to the amount of your loan. The credit life premiums add to the interest charges since the interest is charged on the remaining balance of your loan.
What Does Credit Life Insurance Cover?
This policy helps to cover your remaining loan debt if you die before you repay the loan. For instance, if you buy this policy for your mortgage and you pass away before you pay it back, Your credit life policy will help cover the debt remaining on the home loan at the time you pass away.
This will keep your family from struggling to handle the debt after you pass away. You can typically buy this policy to cover: mortgages, auto loans, line credits, education loans, credit card debt, education loans, and financed retail purchases.
Credit Life Insurance Advantages
This insurance has lots of amazing benefits: it helps to pay off specific debts, like a credit card or line of credit, if you pass away. This is a good option for individuals who want to cover a smaller loan and don’t need a big term life insurance policy.
On average, the policy covers about $5,600, according to Hause Actuarial Solutions. Covering a small debt with credit life insurance is cheaper per $1,000 of coverage than getting a $10,000 term life policy.
The policy also makes handling your estate very easy. Normally, an executor sorts out your properties and debts. And uses your money to pay off what you owe. With credit life insurance, they don’t need to use assets to pay that specific loan debt.
Another advantage of this policy is that it helps co-signers, joint account holders, or spouses (in community property states). If you die, these individuals would have to pay off the debt. Credit life insurance takes that burden away from them, helping protect their credit score.
Also, you can get this policy regardless of your health condition. The best term life insurance rates are for healthy people, but you don’t need to go through a health examination to get credit life insurance.
Disadvantages
Although credit life insurance has its advantages in certain situations, there are often better options depending on your financial needs.
If you have lots of debt, term life insurance offers more coverage at an affordable price. Also, it helps cover more than just debts, like your child’s education or your retirement.
Credit life insurance is also inflexible with its payout. Just like I have mentioned above, the money goes straight to the lender, not your family. This means your family or beneficiaries can’t use the funds for other urgent needs.
How much Does It Cost?
The cost of credit life insurance depends on several factors. These include the loan amount, loan type, and policy chosen. More debt to cover means higher coverage costs.
This insurance is always more expensive than standard-term life insurance. Since the policy is a type of guaranteed issue, it covers you regardless of your health, making it riskier for insurers. Term life insurance, on the other hand, often includes a health check, so if you’re healthy, you get lower rates because you’re seen as less risky.
According to research, a $500,000 term life policy for a healthy 30-year-old woman costs about $336 a year. With a term life policy, you get many times the coverage for a lower annual cost.
Your actual costs for both types of insurance will depend on your age, health, and the amount of coverage you need. To find out your costs, compare quotes for both credit life and term life insurance. Some of the biggest sellers of this policy include CMFG Life Insurance, American Heat & Life Insurance Co., American Federated Life, and Central States Health Life Co. of Omaha.
Can I cancel my Credit Life Insurance?
Yes, cancel the coverage if you wish to end the policy very early. You are also likely to get a refund for premiums that you have not used. For instance, if you pay a premium annually, if you terminate the policy halfway through the policy, you will get a refund for premiums for 6 months.
However, the cancellation of policies depends on lenders. The cancellation can be quite useful if you have already paid back most of your loan and don’t want to continue paying the premium for less coverage. Before purchasing a policy, ask the insurer whether you can cancel the coverage at any time. And the type of refund policy offered.