Credit Life Insurance (Explained)

Despite its name, credit life insurance is very different from other types of life insurance, such as term life insurance. Some may even argue that it isn’t life insurance at all.

So, what is credit life insurance? We’ll discuss this and more below. Keep reading to find out how credit life insurance works and whether it’s right for you.

If you need help finding life insurance, enter your ZIP code into our free quote comparison tool above.

What is credit life insurance?

Credit life insurance is a type of policy that pays off debt if a borrower dies. The coverage amount of the policy will decrease as the balance on a loan does. However, your premiums will stay the same throughout the lifetime of the policy.

Credit life insurance is a little controversial, since some will argue that it protects the lender more than it protects you.

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How does credit life insurance work?

Credit life insurance policies are often offered to individuals taking out a loan, especially auto loans or mortgages. The seller of the policy often highlights that the policy will protect your heirs from having to pay your debt after you die (more on this a little later).

The premium for your credit life insurance may be combined into your monthly loan payment. As you pay down your loan, the value of your policy will also decrease.

When you pass, the policy will be paid out to the lender to pay off the remainder of your debt.

How much is credit life insurance?

While there are no set prices for credit life insurance rates, we can give you an idea of how different factors can affect your premiums.

The premiums for credit life insurance are typically more expensive than regular life insurance. This is because credit life policies can be riskier than traditional life insurance due to two main factors.

First, there is no medical exam to qualify for credit life insurance. Second, if your premiums are included in your monthly loan payment, you could end up paying interest on those monthly premiums.

In general, your credit life insurance premiums will be based on your loan type and loan amount.

Should I get credit life insurance?

For the most part, debt is not inherited. However, if a family member or spouse co-signs on a loan, they may have to continue making payments after you die. And, even if you don’t have a co-signer, your family could lose assets that you haven’t finished paying off.

Therefore, a credit life insurance could be helpful if you want to make sure your family does not have to continue payments and receives your assets with no strings attached.

Credit life insurance can also be helpful in the following states, where community property laws pass both assets and debts to your spouse:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

If you can’t qualify for a traditional life insurance policy, especially due to medical reasons, credit life insurance could be helpful to pay your debt after your death, since there is no medical exam.

However, unless you fall into one of the above categories of individuals, traditional life insurance is likelier to benefit you more.

Read more: Is life insurance an asset?

What are the alternatives?

Here are a few alternative to credit life insurance that may offer the same benefits and more.

Term Life Insurance

Term life insurance is usually less expensive than credit life insurance. It is also more flexible. You can use these policies to pay off debt after your death using the death benefit that is paid to your beneficiaries rather than lenders.

Your death benefit also won’t decrease as the policy goes on. Depending on the amount of your debt, this could mean your beneficiaries are left with some money to use for other purposes.

Other Life Insurance

If a lender is hesitant to give you a loan because of your lack of credit life insurance, you could use an existing policy to provide proof that the debt would be paid off upon your death.

You may need to provide proof of any existing life insurance policies, and you should be comfortable with using a portion of the death benefit toward your debt.

Savings Accounts

While savings accounts may not yield as much as an investment such as life insurance, you could still use this as an asset toward your debts once you pass.

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Case Studies: Exploring Credit Life Insurance Scenarios

Case Study 1: Protecting Co-Signers

John and Sarah are a married couple who recently purchased a new home. Due to their limited credit history, they had to rely on a co-signer to secure a mortgage loan. To ensure that their co-signer isn’t burdened with their debt in case of an unfortunate event, they opt for credit life insurance.

This type of policy will provide funds to pay off the mortgage if either John or Sarah passes away. By choosing credit life insurance, they offer peace of mind to their co-signer, knowing that their financial obligations will be taken care of.

Case Study 2: Estate Preservation

Emily is a successful business owner with substantial debt. She wants to protect her estate and ensure that her family doesn’t inherit her financial obligations.

With credit life insurance, Emily can guarantee that her debts will be paid off upon her death, preserving her estate for her loved ones. This allows her family to receive their inheritance without the burden of outstanding loans.

Case Study 3: Qualification Challenges

Alex is a middle-aged individual with a history of health issues. As a result, Alex struggles to qualify for traditional life insurance policies that require a medical examination.

However, Alex wants to ensure that their debts are covered after their passing. Credit life insurance offers a viable solution since it doesn’t require a medical exam. By choosing credit life insurance, Alex can protect their loved ones from inheriting their debt.

Case Study 4: Community Property Laws

In certain states, community property laws dictate that both assets and debts are passed on to the surviving spouse after a partner’s death. Sarah and Michael live in one of these states and are concerned about the financial impact on the surviving spouse if one of them were to pass away.

To address this concern, they opt for credit life insurance, ensuring that their debts will be covered, and their surviving spouse won’t bear the financial burden alone.

Summing It Up

Credit life insurance is a policy that can help you pay off remaining debt upon your death. It may be offered with loans, especially auto loans or mortgages.

The value of your credit life insurance will decrease with your loan balance. It is paid directly to the lender upon your death.

Unless you want to protect a co-signer, make sure your estate doesn’t pay for your debts, live in a state with community property laws, or can’t qualify for traditional life insurance, it may not be the best option to buy credit life insurance.

To find a life insurance policy that’s right for you, use our free quote comparison tool below by entering your ZIP code.

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