What is Credit Life Insurance, and Do You Really Need It?

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What Is Credit Life Insurance, and Do You Really Need It?
Credit life insurance can help you pay off your loan if you die. However, it is not needed.
By Georgia Rose Lead Writer | Science, technology, and insurance Georgia Rose is a lead writer at NerdWallet and oversees content on life insurance. In her long career, Georgia has written on a variety of topics such as personal finance, policy issues for government as well as science and technology. She enjoys researching complex topics and distilling the data for her readers.





Jun 29, 2020


Editor: Lisa Green Assigning Editor | Data journalism, insurance Lisa Green was an insurance writer at NerdWallet before being elevated to editor. Prior to that, she worked for over 20 years working as editor at The Tennessean in Nashville, where she was part of a 2012 Pulitzer Prize finalist team. Her work has earned her prizes from The Society of American Business Editors and Writers, editors and Investigative Reporters along with The Society of Professional Journalists.







Many or all of the products we feature are from our partners who compensate us. This impacts the types of products we write about and the location and manner in which the product appears on the page. But, it doesn't influence our opinions. Our views are our own. Here's a list and .



There's a degree of risk involved when you take out a loan, especially if you're borrowing a lot of money. Protecting others from shouldering your debts should you die is a common issue. However, debts aren't usually passed down through the generations, so the family members you love will not be responsible for your loan.
In some situations, though the debt you take on could have a negative impact on those you leave behind. Credit life insurance helps lessen these risks by paying back the lender if you die prior to paying off the loan. However, this type of insurance isn't required in all circumstances and is often very costly. Before buying a policy, take into consideration the cost and consider alternatives like term life insurance, which usually gives the same security for a lower cost.
What is credit life insurance?
Credit life insurance pays off the loan when you die prior to paying off the debt. The value of the policy is tied to loan amount; as you pay off the debt, the insurance amount decreases. If you pass away before paying off the loan the insurance company will pay the remaining debt.
Credit life insurance doesn't really safeguard you in the same way as it shields the lender. Your rates remain the same for the duration of the policy , regardless of how small the loan gets. And lenders are almost always the beneficiary of credit, which means the payout goes directly to them and not to your heirs -- if you die.
Different types of credit insurance
The credit life insurance policy is special kind of insurance that pays when you die. Other kinds of credit insurance pay loans in less dire circumstances, such as voluntary unemployment, disability, theft or destruction of personal property or time off.
What does credit life insurance provide?
Credit life insurance may protect against auto loans and education loans and bank credit loans and various other loans. In general, the amount of insurance you purchase can't exceed the amount you owe for the loan.
Your state may set the maximum limits of coverage on credit life insurance policy. For example credit life insurance policies for mortgages in New York typically can't exceed $220,000. Thus, if the mortgage is $440,000, your mortgage insurance could only be able to cover half of the loan.
In general the case, credit life insurance is sold by banks or lenders when you make an loan. But you're not typically required to buy coverage if you don't want it. Indeed, loan providers aren't able to deny the loan application due to the borrower's decision not to purchase optional credit insurance, as per the Federal Trade Commission. It's also illegal for lenders to offer credit insurance without your knowledge or consent.
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Alternatives to credit life insurance
When shopping for loan insurance Credit life isn't the only choice. Consider the following alternatives before purchasing an insurance policy.
Credit life insurance in contrast to. the term insurance
Standard is able to pay off your loans when you die and is generally less expensive in comparison to credit life insurance, and is more flexible. The death benefit stays the same throughout the length of the policy and pays to the beneficiary regardless of loan amount.
You can also use your term insurance. This means your heirs -- not the lender -will receive the funds regardless of the amount you've paid off your loan you've paid off, and they are able to use the money for any purpose.
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Existing life insurance policies
Instead of buying more coverage it is possible to use an current term insurance policy or a permanent insurance policy to pay for the cost of a loan. Remember that lenders may want to see proof of insurance coverage prior to approving the loan. Make sure that you're comfortable transferring some of the funds from your existing policy to fund the loan, especially when you purchased the policy to cover certain expenses.
Traditional savings account
Savings or investment accounts can provide a valuable financial safety net. If the money in your savings account can be used to pay off any outstanding obligations after your death and you are not a victim of financial hardship, you don't need insurance.
Is credit life insurance the right choice for you?
There's a good chance that you don't require the insurance for credit life if your only problem is debt inheritance. It's because the debt you owe rarely will be handed over to your heirs after you die. Instead, your estate settles your debts using your assets. If there's not enough money to cover what you owe, the debt typically goes unpaid, and relatives aren't required to pay it.
There are instances where an unpaid loan could have a negative impact on an estate's planning. Life insurance can be an effective tool for the following situations:
Your estate shouldn't be used to pay your debts. When you die and you're not able to pay back the loan, the property you borrowed money for -like houses or cars- may be sold to repay the lender. This may decrease the amount left to your heirs. The loan insurance will cover any unpaid dues if you die and the debt is kept from your estate.
It is important to safeguard co-signers. If you are co-signers, you're both responsible for the debt. Credit life insurance will pay any outstanding debt if you die, removing the burden from any surviving co-signers.
You live in a community property state and want to protect your spouse. In states with community property laws, your assets and obligations typically transfer over to the spouse. Credit life insurance pays off the loan so that your spouse does not have to. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are states that have law governing community property.

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How much will credit Life insurance price?
The premiums for credit life insurance vary across states and are dependent on the amount and kind of loan. The costs can be higher than other life insurance products because of two key aspects:
The coverage is usually guaranteed no matter what your medical condition is. As with most policies, insurance companies typically charge higher premiums when they don't know your medical history as the risk of insuring you increases. Not all Life insurance products that are credit-based can be guaranteed. Your age, health and job status could affect your insurance coverage.
Lenders sometimes roll insurers' premiums in with in the loan payment. This might sound as a great idea however, it could be costly. It's basically borrowing money to pay insurance premiums, which increases the interest you pay.

Below are some sample annual rates for terms and life assurance policies with credit for those healthy and in good health according to data from the .
Age



Credit life



Term life



30


$370


$78


40


$370


$92


50


$370


$163


60


$370


$321








Can you cancel credit life insurance?
You could be able to cancel your coverage and get a refund of your premiums in the event that you need to end the loan life insurance contract earlier. But, cancellation rules differ between lenders. The ability to cancel your policy can be beneficial if you are paying the majority the amount of your loan and don't wish to continue paying the high cost for coverage that is less.
Before you purchase an insurance policy, make sure you know if you are able to cancel the policy early and what type of refund policy, if any, is available.



About the writer: Georgia Rose is a lead writer for NerdWallet and is responsible for our content on shopping for life insurance. The work she writes has appeared featured on The New York Times, The Washington Post, The Independent and ABC News.







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