What is Credit Life Insurance, and Are You Really Needing It?

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What Is Credit Life Insurance, and Are You Really Needing It?
Credit life insurance can help you pay off your loan if you die. But coverage is often not necessary.
By Georgia Rose Lead Writer | Technology, science, insurance Georgia Rose is a lead writer for NerdWallet and oversees content on life insurance. In her long career, Georgia has written on a variety of topics such as personal finance, government policy as well as science and technology. She is a fan of researching complex subjects and distilling the information for her readers.





Jun 29, 2020


Edited by Lisa Green Assigning Editor | Data journalism, insurance Lisa Green was an insurance writer at NerdWallet before she was made editor. Before that, she worked for more than 20 years as an editor at The Tennessean in Nashville, where she was part of the 2011 Pulitzer Prize finalist team. Her work has been recognized with prizes at The Society of American Business Editors and Writers and editors and Investigative Reporters along with The Society of Professional Journalists.







The majority or all of the products we feature are from our partners who compensate us. This affects the products we write about and the location and manner in which the product appears on a page. But, it doesn't influence our evaluations. Our opinions are entirely our own. Here is a list of and .



There's a certain amount of risk involved when you take out a loan in particular if you're borrowing a lot of money. In order to protect your loved ones from having to pay for your debts if you die can be a natural worry. However, debts are rarely passed down through the generations, so the family members you love will not be liable for your loan.
In certain situations, however, your debt can have a negative impact on those that you pass on. Credit life insurance helps lessen these risks by paying back the lender in the event of your death before paying off the loan. But this type of insurance isn't always necessary and is often very costly. Before buying a policy, consider the costs and explore alternatives such as term life insurance. It typically provides the same insurance for less.
What is credit life insurance?
Credit life insurance pays off the loan when you die prior to making payment on the debt. The policy's face value is tied with the loan amount. As you pay down the loan, the coverage amount decreases. If you pass away before having paid off the loan the insurance company pays the balance of the loan.
The credit life insurance policy doesn't safeguard you in the same way as it shields the lender. Your rates remain the same throughout the length of the policy , regardless of what size the loan grows. The lenders are usually the beneficiaries of credit , which means the payout goes directly to them -- not your heirsshould you pass away.
Types of credit insurance
Credit life insurance is a specific type of insurance that pays in the event of your death. Other kinds of credit insurance are able to repay loans in less dire circumstances, such as voluntary unemployment disability, disability, theft, loss of property or time off.
What does credit life insurance cover?
Credit life insurance can protect against auto loans as well as education loans and bank credit loans or other types of loans. In general, your insurance coverage you purchase can't exceed the amount you are owed on the loan.
The state you live in may establish maximum coverage limits on credit life insurance policy. For instance credit life insurance policies for home mortgages within New York typically can't exceed $220,000. So, if your mortgage is valued at $440,000, the mortgage insurance might only provide half the loan.
In generally, credit life insurance is sold by banks or lenders when you make a loan. But you're not typically obliged to purchase the coverage if you don't wish to purchase it. Actually, lenders aren't able to deny the loan application because of the borrower's refusal to purchase optional credit insurance, according to the Federal Trade Commission. It's also illegal for lenders to include credit insurance without knowing 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 buying an insurance policy.
Credit life insurance in contrast to. the term insurance
Standard is able to help you pay off your loans if you die, and it's typically cheaper in comparison to credit life insurance, and is more flexible. The death benefit remains the same throughout the length of the policy, and it pays to the beneficiary regardless of loan amount.
Additionally, you are able to use your term policy. That means that your heirs- not the lender -- receive the money, no matter how much in you've paid off the loan you've paid back, and they can use the funds for whatever purpose they choose.
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Existing policies for life insurance
Instead of purchasing additional coverage, you can make use of an existing term or permanent life insurance policy to pay for the costs of a loan. Remember that lenders may want to see proof of coverage before proceeding. Make sure that you're comfortable transferring part of the money from the existing policy to cover the loan, especially when you purchased the policy to cover certain expenses.
Traditional savings account
Savings or investment accounts can be a great security net for your financial. If the funds in your savings account help cover any outstanding debts after you die and you are not a victim of financial hardship, you don't need insurance.
Are credit life insurance policies right for you?
You probably don't need credit life insurance if the only issue is inheritance of debt. That's because your debt rarely will be handed over to your heirs after you die. Instead, your estate settles your debts using your assets. If you don't have enough funds to pay the debt the debt, it's usually unpaid, and family members aren't legally required to pay for it.
There are occasions when an outstanding loan can have a negative impact on your estate planning. Life insurance can be beneficial for the following situations:
Your estate doesn't need to cover your debts. After your death or pass away, the item that you borrowed money to purchase -for example, houses or carscould be sold in order to pay the lender. This could reduce the amount that is left to your heirs. Loan insurance covers any outstanding dues if you die and the debt is kept out of your estate.
You should protect co-signers. When you you're equally in charge of the debt. Credit life insurance will pay any outstanding debt in the event that you pass away, taking the obligation from any remaining co-signers.
If you live in a community property state and would like to safeguard your spouse. In states with community property laws, your assets -- as well as your debts typically pass to your spouse. A credit life insurance policy pays off the loan to ensure that your spouse doesn't need to. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are states with law governing community property.

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How much will credit Life insurance price?
Credit life insurance premiums vary among states and are based on the amount and the nature of the loan. The costs can be higher than other life insurance policies because of two major aspects:
Insurance coverage is generally guaranteed whatever your condition. Similar to most policies insurers typically charge higher rates in the absence of a medical history because the risk of insuring you rises. Some Life insurance products that are credit-based can be guarantee-based. Your age, health status and job status could affect your eligibility.
Some lenders will roll insurance premiums into the loan payment. This may sound to be a smart idea but it could result in a higher cost. You're essentially borrowing money to pay your insurance premiums, which will increase the amount of interest you pay.

Below are the annual rates for term and credit life insurance policies for people who is healthy 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?
It is possible to cancel your insurance and get a refund of the premiums if you have to terminate your credit life insurance policy earlier. However, cancellation policies vary among lenders. The ability to cancel your insurance policy could be useful if you pay off the bulk part of the loan and don't want to continue paying the high price for less protection.
Before purchasing an insurance policy, make sure you know if you can cancel coverage early and what refund policy If any is available.



About the author: Georgia Rose is a chief writer for NerdWallet and is responsible for our content on shopping for life insurance. Her work has been highlighted in The New York Times, The Washington Post, The Independent and ABC News.







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