Life insurance policies come in many different forms. Each policy has been specifically designed by insurance companies to cater to every need of an individual.
Even though life insurance is widely known to provide support to the insured’s family after their passing, it can have many other uses as well. For example, a credit life insurance that does not focus on providing a death benefit to the insured’s beneficiaries.
Then what exactly is it? Let’s find out.
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What is Credit Life Insurance?
Credit life insurance is a type of life insurance policy that has been specifically designed to pay off any outstanding debts or loans that a borrower has at the time of their passing. As the loan and debt is paid off over time, the face value of a credit life insurance policy decreases in proportion with the outstanding loan amount until both reach zero value after which the policy lapses.
What Does Credit Life Insurance Cover?
Credit life insurance is typically sold at mortgage closings by banks. However, it is also bought with a car loan or a line of credit. The main aim of credit life insurance is to protect your heirs in case you die by paying off your loans so they do not have to deal with it.
If your spouse or someone else has co-signed on your mortgage, they will be protected from making loan payments after your death through credit life insurance for mortgage.
This can prove beneficial if you are the primary breadwinner in your household and if you pass away, it would be difficult for your co-signer to continue making loan payments with no proper income.
However, in most cases, if you have any heirs that have not co-signed the mortgage, they will not be obligated to pay off your loans if you die as debts are not typically inherited. There is an exception of a few states that recognize community property. But even then, only a spouse could be responsible for your debts, never your children.
When banks loan anyone money, they have accepted the risk that the borrower could die before they have repaid the loan. So keeping that in mind, credit life insurance will essentially be protecting the lender and not your heirs. In fact, even the payout from a credit life insurance claim does not go to your heirs but to the lender.
So to answer the question, “what does credit life insurance cover?”, it covers any outstanding loans or debts you have after your death so that your family is not burdened with it
Alternatives to Credit Life Insurance
If your main goal when looking for life insurance is to protect your spouse from having to pay off your debts, it would make more sense for you to purchase term life insurance instead of credit life insurance. With a term life insurance, if you die during the term of your policy, your spouse will receive the value of your policy, that too without any tax. Another reason to get term life insurance instead of credit life insurance is that it is usually cheaper while offering the same coverage amount.
Credit life insurance also tends to drop over the course of the policy as your outstanding debt gets paid since it only covers that. However, the face value of a term life insurance policy remains the same through the course of the policy.
However, an advantage of credit life insurance is that it requires less stringent health screening. In some cases, there might be no medical exam at all. This is also known as guaranteed issue life insurance. But a term life insurance policy, which is almost always contingent on a medical exam even when you are in good health, will have pricier premiums if you are above a certain age.
Even though it is against the federal law to require credit life insurance in a loan or to make loan decisions on whether or not you will be accepted for credit life insurance. However, credit life insurance is usually built into a loan. Although, this can end up making your monthly payments higher which is why it is important to discuss with your lender what your policy entails as every policy is different.
How Much Does Credit Life Insurance Cost?
Although there is no credit life insurance age limit, it can still end up costing more than traditional life insurance policies do.
There are usually three factors determining the cost of a credit insurance policy: the type of credit, loan amount and type of policy. Credit life insurance can generally be pricier as there is greater risk associated which leads to higher premiums.
There is higher risk with credit life insurance policies as it is essentially known as a guaranteed issue product which means that you can be eligible based on your status as a borrower. However, unlike most policies, you will not have to take a medical exam or reveal any health details as you are the one being insured, only your loan is. You can use a credit life insurance calculator to find out how high your premiums would be according to the outstanding debt amount.
So to sum it up, credit life insurance pays off your debts if you die. You can either purchase it at a mortgage closing from the bank or when you get a car loan or take out a line of credit.
This type of insurance is useful when you have a co-signer on the loan as it would protect them from having to repay the debt. Credit life insurance will also protect your spouse or heirs in those states where heirs are liable to pay off their parent’s outstanding debts.
This is one of the best things you can do for your family before you leave as it will protect them from the financial burden of repaying your loan after you are gone.