What is Creditor Group Life Insurance?
Creditor group life insurance allows a creditor (e.g., a mortgage lender or credit card company) to insure the lives of their debtors. This type of group life insurance is designed to cover any outstanding debts when a debtor dies.
Mitigating risk for creditors
When any financial institution lends money, they face the risk that the borrower won’t repay the debt. They put a number of protocols and controls in place to mitigate that risk, but there are certain things out of their hands.
The death of a debtor is certainly one of those things. If an individual who owes money passes away, the creditor could be left in a challenging situation.
This risk grows with the number of debtors to whom the financial institution has issued credit. If a large number of people with significant debts were to die at a similar time, the creditor could become insolvent.
Creditor group life insurance is designed specifically for this risk. As group coverage, it allows the creditor to buy a single policy to insure a group of their debtors. Then, when one of their insureds dies with outstanding debt, the creditor can make a claim against the policy to recoup the money that the now-deceased individual owes.
Creditor group life insurance is generally available to larger lenders and financial institutions like banks, credit unions, credit card issuers, mortgage lenders, and student loan companies.
Who creditor group life insurance benefits
These group life policies protect the creditor, clearly, helping them to avoid significant unanticipated losses over a short period of time. But the people the debtor leaves behind also benefit from creditor group life insurance.
Because these insurance policies give the creditor a way to recoup what’s owed, that outstanding balance doesn’t get passed to the debtor’s estate. That leaves more money to the people the now-deceased debtor name as heirs and beneficiaries.