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 could be used to pay off your loan in the event of your death. But coverage is often not needed.
By Georgia Rose Lead Writer | Science, technology, insurance Georgia Rose is a lead writer for NerdWallet and is responsible for the writing of content related to life insurance. In her long career, Georgia has written on various 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 data for her readers.





Jun 29, 2020


Edited by Lisa Green Assigning Editor | Data journalism, insurance Lisa Green was an insurance writer at NerdWallet prior to being made editor. Before that, she worked for 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 won awards by organizations like the Society of American Business Editors and Writers and editors and Investigative Reporters as well as the Society of Professional Journalists.







The majority or all of the products featured here come from our partners who compensate us. This impacts the types of products we review and where and how the product is featured on a page. However, this does not affect our assessments. Our views are our own. Here's a list and .



There's a certain degree of risk involved when you take out a loan particularly in the event that you're borrowing a large amount of money. The idea of preventing others from taking on your debts if you die can be a natural worry. But, debts aren't often passed down from generation to generation, so your family members won't have to pay for your loan.
In certain circumstances, however, your debt can have negative consequences for the ones 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 necessary in all cases and it can be costly. Before purchasing a policy, consider the costs and explore other options like term life insurance, which typically gives the same insurance for less.
What is credit life insurance?
Credit life insurance will pay off your loan in the event that you die prior to paying off the debt. The policy's face value is linked to loan amount; as you pay off the debt, the coverage amount decreases. If you die before making payments on the loan the insurance company will pay the balance of the loan.
Life insurance for credit doesn't provide protection to you, but it shields the lender. Your rates remain constant throughout the term of the policy regardless of whether or not the loan becomes. In most cases, lenders are the primary beneficiary of credit , meaning that the cash payout is made directly to them -- not your heirsshould you pass away.
Types of credit insurance
Credit life insurance is a special type of that pays out if you die. Other kinds of credit insurance pay loans in less severe situations, like involuntary unemployment and disability, theft or the destruction or loss of your personal belongings, or leave of absence.
What does credit life insurance protect?
Credit life insurance may cover mortgages, auto loans as well as education loans as well as bank credit loans and various other loans. In general the amount of insurance cannot exceed what you owe to the loan.
Your state can set the maximum coverage limits in credit-based life insurance. For example credit life insurance policies for mortgages in New York typically can't exceed $220,000. Therefore, if your mortgage is worth $440,000, your credit life insurance policy could only provide half the loan.
In general, credit life insurance is offered by lenders or banks when you make the loan. You're usually not obliged to purchase the coverage if you don't wish to purchase it. Actually, lenders cannot deny a 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 offer credit insurance without knowing or consent.
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Alternatives to credit life insurance
When shopping for loan insurance, credit life isn't your only choice. Consider the following alternatives before purchasing the policy.
Credit life insurance vs. Life insurance with a term
Standard can be used to pay off your loans in the event of your death, and it's typically cheaper as well as more adaptable than credit insurance. The death benefit stays constant throughout the term of the policy and pays out regardless of the loan amount.
Additionally, you are able to use your term policy. That means that your heirsnot the lender- receive the money regardless of the amount of the loan you've paid back, and they can use the money for any purpose.
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Life insurance policy policies that are in force
Instead of purchasing additional coverage it is possible to make use of an already existing permanent or term life insurance policy to protect the costs of a loan. Keep in mind that lenders might want to see proof of coverage before proceeding. Make sure that you're able to allocate some of the funds from your existing policy to fund the loan, especially if you bought the policy in order to cover specific costs.
Traditional savings account
Savings or investment accounts are a good financial safety net. If the funds saved in the savings accounts are able to assist in paying off debts after you die, you may not need insurance.
Is credit life insurance the right choice for you?
You probably don't need Life insurance on credit if the only concern is debt inheritance. It's because the debt you owe rarely is passed to your heirs once you pass away. Instead, your estate settles your debts using your assets. If there's not enough money to pay what you owe the debt, it is usually not paid, and family members aren't obliged to settle it.
There are instances where an unpaid loan can have a negative impact on an estate's planning. Life insurance is an effective tool in the following scenarios:
Your estate doesn't need to be used to pay off your dues. After your death and you're not able to pay back the loan, the property that you borrowed money to purchase -like the house or car- may be sold to repay the lender. This can decrease the amount left to your inheritors. Loan insurance covers any outstanding payments if you die and the debt is kept out of your estate.
You want to protect co-signers. When you you're equally accountable for the debt. Credit life insurance pays any outstanding debt if you die, thus removing the burden from any surviving co-signers.
If you live in a community property state and you want to safeguard your spouse. In states with community property laws, your assets -- and your obligations typically transfer onto your partner. Credit life insurance will pay off the loan so your spouse doesn't need 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?
Credit life insurance premiums vary between states and depend on the amount and kind of loan. Costs can be more than for other life insurance products because of two key aspects:
Coverage is typically guaranteed, whatever your condition. Similar to most policies insurers typically charge higher rates in the absence of a medical history as the risk of insuring you is increased. The majority of Life insurance products that are credit-based can be guaranteed. Your age, health and employment status may impact your insurance coverage.
The lender may incorporate in insurance costs into in the loan payment. This may sound like a good idea, but it could be costly. You're essentially taking out loans to cover insurance premiums, which increases the interest you pay.

Below are sample annual rates for policy for credit and term life policies, for those 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?
You may be able to end your coverage and receive a refund on your premiums in the event that you need to end the credit life insurance policy earlier. But, cancellation rules differ among lenders. The option to cancel your policy can be beneficial if you are paying off the bulk the amount of your loan and don't want to pay the high price for less protection.
Before purchasing insurance, inquire if you can cancel coverage early and what kind of refund policy If any is offered.



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







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