What is Credit Life Insurance?
Credit life insurance is a specialized type of life insurance policy designed to cover the insured’s outstanding debts when they die. As the insured pays off their debt, the face value of the policy shrinks.
How credit life insurance works
There are several types of credit insurance, which steps in if you take out a loan and are, for some reason, unable to pay it. While other types of credit insurance might activate if you get injured and are unable to work, for example, credit life insurance only steps in when you pass away.
This specialized type of life insurance can cover most types of loans, including:
Mortgages
Student loans
Car loans
It generally won’t be available for revolving lines of credit, like a credit card. That’s because this type of insurance is directly tied to the loan amount, and that amount fluctuates with credit card debt.
When you buy credit life insurance, you’re buying a policy with a decreasing face value. In other words, as you pay off the debt, the face value (i.e., the amount the policy would pay out if you died) shrinks along with your outstanding loan amount.
The price you pay for credit life insurance usually stays the same, though. That means that by the end of your policy term, which coincides with you paying off the loan in full, you’re paying premiums for insurance that offers you virtually no benefit.
When people buy credit life insurance
Generally, people get credit life insurance from the same financial institution with which they’re taking out the loan. It might get offered to you when you apply for a mortgage or auto loan, for example.
It can be enticing to people who worry about leaving their loved ones with debt. Review the laws in your state, though. In many cases, outstanding debts don’t get passed to the next-of-kin.
If someone’s co-signing on a loan with you, though, they would be responsible for the debt if you died. That can make credit life insurance more appealing.
Just because a lender offers you credit life insurance doesn’t mean you should take it, nor does it mean you have to. In fact, the Federal Trade Commission stipulates that you can’t be denied a loan because you didn’t purchase the credit life insurance.
If you’re concerned about leaving your loved ones with financial obligations after you’re gone, a traditional life insurance policy will generally offer you a significantly higher return-on-investment than credit life insurance.
With credit life insurance, the policy benefit decreases over time and goes straight to the lender if you die. With a term or permanent life insurance policy, though, the face value doesn’t shrink through the years and your beneficiaries get the money. They could use the policy’s payout to cover any debts that pass to them when you’re gone — and have the option to use any leftover money however they want or need.
