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

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What Is Credit Life Insurance, and Are You Really Needing It?
Credit life insurance can be used to pay off your loan if you die. However, coverage isn't always necessary.
Written by Georgia Rose Lead Writer | Science, technology, insurance Georgia Rose is a lead writer at NerdWallet and manages the content for 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 is a fan of researching complex subjects and distilling the information for her readers.





Jun 29, 2020


Written by Lisa Green Assigning Editor | Data journalism, insurance Lisa Green was an insurance writer at NerdWallet before being promoted to editor. Previously, she spent more than 20 years as an editor for The Tennessean in Nashville, which was where she was part of the 2011 Pulitzer Prize finalist team. Her work has been recognized with accolades from the Society of American Business Editors and Writers as well as editors and Investigative Reporters, along with The Society of Professional Journalists.







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There's a certain amount of risk when you take out an loan, especially when you're borrowing lots of money. Protecting others from shouldering your debts should you die is a common concern. However, debts aren't usually passed down through the generations, so the family members you love will not be liable for the loan.
In certain situations, however the debt you take on could have negative consequences for the ones who you will leave. Credit life insurance helps lessen the risk by reimbursing the lender in the event that you die before paying off the loan. But this type of insurance isn't required in all circumstances and is often very costly. Before you buy a policy, consider the costs and explore alternatives like term life insurance, which usually provides the same insurance for less.
What is credit life insurance?
Credit life insurance will pay off the loan when you die prior to settling the debt. The value of the policy is tied to loan amount. As you pay off the debt, the insurance amount decreases. If you die before making payments on the loan the insurance company pays the balance of the loan.
Credit life insurance doesn't really provide protection to you, but it shields the lender. The premiums remain the same throughout the length of the policy , regardless of how small the loan gets. And lenders are almost always the beneficiaries of credit , which means the money is paid directly to them -- not your heirs- if you die.
Types of credit insurance
Life insurance for credit is one special type of that pays out in the event of your death. Other kinds of credit insurance are able to repay loans in less dire circumstances, such as involuntary unemployment and disability, theft or the destruction or loss of your personal belongings or leave of absence.
What does credit life insurance provide?
Credit life insurance is a way to be used to cover auto loans and education loans as well as bank credit loans and various other loans. In general, your insurance coverage you purchase can't exceed the amount you owe to the loan.
Your state may set maximum coverage limits for credit life insurance policies. For instance, the credit life insurance policy that cover mortgages in New York typically can't exceed $220,000. So, if your mortgage is $440,000, your credit life insurance policy could only cover half of the loan.
In generally the case, credit life insurance is provided by lenders or banks when you take out an loan. However, you're generally not required to purchase coverage if you don't wish to purchase it. Actually, lenders cannot reject a loan application due to the borrower's refusal to buy optional credit insurance, as per the Federal Trade Commission. It is also unlawful for lenders to offer credit insurance without knowing or your consent.
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Alternatives to life insurance with credit
If you're in the market for loan insurance you should be aware that credit life isn't the only option. Think about the following alternatives prior to purchasing the policy.
Credit life insurance vs. the term insurance
Standard can be used to pay off your loans in the event of your death It's usually cheaper in comparison to credit life insurance, and is more flexible. The death benefit stays the same for the duration of the policy and pays in regardless of loan amount.
Additionally, you are able to use your term insurance. This means your heirs -- not the lender -will receive the funds, no matter how much in your loan you've paid back, and they can use the funds for whatever purpose they choose.
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Existing life insurance policies
Instead of buying more coverage instead, you could take advantage of your already existing permanent or term life insurance policy to cover the cost of a loan. Remember that lenders might need to see proof of insurance coverage prior to approving the loan. Be sure that you're comfortable transferring part of the money from the existing policy to cover the loan particularly in the event that you purchased the policy in order to cover specific expenses.
Traditional savings account
Existing savings or investment accounts can provide a valuable security net for your financial. If the money saved in the savings accounts be used to pay off any outstanding obligations after your death or pass away, you might not require insurance.
Is credit life insurance the right choice for you?
You probably don't need credit life insurance if the only problem is debt inheritance. This is because your debt seldom is passed to your heirs once you pass away. Instead, your estate settles your debts using your assets. If you do not have enough money to cover what you owe the debt, it's usually unpaidand your relatives aren't required to pay it.
There are occasions where an unpaid loan can have a negative impact on an estate's planning. Life insurance can be a useful tool for the following situations:
You don't want your estate to pay your obligations. When you die and you're not able to pay back the loan, the property you borrowed money for --like the house or carcan be sold to pay back the lender. This can reduce the amount left to your inheritors. The loan insurance will cover any unpaid payment if you pass away leaving the debt from your estate.
You want to protect co-signers. When you co-sign, you're equally accountable for the debt. Credit life insurance will pay any outstanding debts if you die, thus removing the responsibility from the surviving co-signers.
If you live in a community property state and you want to protect your spouse. In states with community property laws, your assets -- and your debts -- typically pass over to the spouse. Credit life insurance helps pay off the loan so that your spouse does not need to. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are states with community property laws.

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How much does the credit life insurance cost?
Credit life insurance premiums vary among states and are based on the amount and the type of the loan. Costs can be more than for other life insurance policies due to two main factors:
Insurance coverage is generally guaranteed no matter what your medical condition is. Similar to most policies insurers typically charge higher rates even if they don't have your medical history, as the risk to insure you is increased. Some Life insurance products that are credit-based can be guaranteed. Your health, age and work status can affect your ability to qualify.
Some lenders will roll insurers' premiums in with the loan payment. This might sound like a good idea, however, it could end up costing you more. You're essentially borrowing money to pay your insurance premiums, which will increase the amount you pay for interest.

Below are sample annual rates for term and credit life insurance policies for a person 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?
It is possible to end your coverage and receive a refund on the premiums if you have to terminate a Credit life insurance plan before the due date. The cancellation policy may differ between lenders. The option to cancel your policy can be helpful if you're paying off the bulk part of the loan and don't wish to continue paying the high premium for less coverage.
Before you buy an insurance policy, make sure you know if you can cancel coverage early and what refund policy, if any, is offered.



About the writer: Georgia Rose is a the lead writer at NerdWallet and manages our blog posts on buying life insurance. She has had her work highlighted on The New York Times, The Washington Post, The Independent and ABC News.







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