Credit Life Insurance: Is It The Best Option For You?
Life insurance policies are one of the best ways to financially protect your loved ones in the event that you pass away while you’re covered. Typically, policies guarantee a sum to your beneficiaries so long as you pay regular premiums, but there are some specialized plans that offer very specific or limited coverage.
Credit life insurance is an example of these types of insurance plans. Unlike a traditional life insurance policy, credit life is tied to certain types of debt and only covers what you owe. This can be a popular route for people with a mortgage or student loans to pay.
Depending on your situation, this may or may not need to be a necessary facet of your personal finance plans. Read our guide to find out more about its key features so you can decide what’s best for you!
What Is Credit Life Insurance?
Credit life insurance is a form of decreasing term life that is designed to pay off specific personal loans. The most common are mortgage loans, but people also use them to pay off a student loan, car loan, or even credit card debts.
A credit life insurance policy will pay off your loan balance over time. As your loan is paid, the face value of your policy decreases proportionally.
This type of plan is only tied to one of your loans, so if you have several kinds of debt it’s possible to hold multiple credit life insurance policies at once.
How Does It Work?
Credit life insurance is marketed as a means to protect your family from inheritable debt from personal loans, especially in cases where your spouse or partners are a cosigner on a mortgage. Because it’s a guaranteed issue life insurance, you won’t need to pass a medical exam or go through an underwriting process.
This type of insurance is most commonly sold by an insurance company or banks when you close a mortgage, which is why mortgage life insurance is the most popular form of credit life. The coverage amount guarantees that mortgage payments continue even after the borrower dies and might be one of the best personal loan management options.
How Do You Get It?
You may be offered or opt for a credit life insurance policy when you take out personal loans like home, student, or auto loans or have debt on credit cards. Like all life insurance plans, to enforce the policy you must pay regular premiums. The premiums you’ll have to pay for credit life insurance are commonly integrated into your monthly loan payments.
Sometimes, a lender may require credit life insurance, but in most cases, it isn’t mandatory and you won’t be denied the loan if you refuse to get it. If you’re not certain, it’s best to check the terms of your loans first with your lender.
Credit life insurance is usually purchased in two ways:
The first option is through a single premium purchase, wherein your total premium is calculated upfront. This is added to your loan amount and increases interest charges incrementally. The second option is through your monthly outstanding balance, which varies payments depending on your current loan balance.
Advantages Of Credit Life Insurance
The main benefit of getting credit life insurance is that it prevents your family or dependents from inheriting your debts. When your policy goes into effect, you won’t be taxed for what gets paid into your loan.
If your savings aren’t enough and you aren’t already covered by a broader life insurance plan, creditors may pull money from your assets to pay off your loan instead. This includes savings accounts, houses, estates, or any investments you have on the market. A credit life insurance policy can be a valuable safeguard against these situations, ensuring that these assets can be passed on to your heirs instead of being seized.
Since a medical exam isn’t required, a credit life policy might be the best option for those that aren’t insurable. This means anyone who can’t qualify or would be charged exorbitantly for traditional life insurance due to their health conditions. If this is the case, you may want to consider credit life insurance.
Lastly, because credit insurance covers a specific personal loan, you won’t have to worry too much about coverage exclusions. These refer to conditions imposed on a standard insurance policy that limits coverage so companies don’t lose out. Some examples include “earth movements”, “neglect”, and “government action”.
Disadvantages Of Credit Life Insurance
A big drawback to consider is that your credit life insurance coverage decreases over time as you pay off the loan it's connected to. In most situations, you’re effectively paying higher premiums than the average term life insurance plan for less coverage.
You need to know that the higher premiums you’ll be paying for your policy may actually be a result of one of the advantages of credit insurance. Because a medical exam isn’t required, the life insurance company is taking on more risk. With standard whole life or term life insurance, the best rates go to those without health conditions because companies bet on not having to pay out before the insurance policy expires.
Another disadvantage to consider is that in the event that the borrower dies, credit life insurance pays the death benefit directly to the lender. For what you pay, you may be able to find an insurance life policy that pays off your debts and guarantees an amount to your beneficiaries.
When Is It Worth It?
Credit life insurance policies can be valuable tools to pay off any debts you may have. But is it the best option? That depends!
If you aren’t looking for much coverage and want something that will address your personal loans without encroaching too heavily on your savings accounts, this could be the way to go.
The most common users include those with a mortgage or student loans. However, a credit insurance policy may only be cheaper than standard insurance for small loans. You probably won’t not be saving that much with a policy coverage of more than an average of $5600.
For the best personal loan management, you may want to consider other products and services that suit your needs best while providing more benefits. Regular term insurance should be able to cover the debt on your mortgage or student loan while also providing your beneficiaries with an amount in the event of your death. Whole life insurance plans also allow you to accumulate cash that you can withdraw over time.
It’s also best to note that though the most common sales pitch for credit life is to prevent debt from being passed down to your heirs or partners. Most states don’t allow debt to be inherited unless you’re a cosigner on home loans. Exclusions are dependent on where you are, so it's best that you double check your state laws.
When shopping for insurance, first evaluate your financial situation. Determine how much coverage you’ll need and what type of budget you're working with. This will help ensure you aren’t overpaying for coverage or features.
The best credit building practices include paying loans, and credit cards on time. Consider setting up recurring payments to avoid missing deadlines. It can be as simple as filling out an online form. You’ll be asked for some personal information like bank details and your routing number. This will help you avoid building up small debt in the first place which eliminates the need for credit life insurance.
The Bottom Line
A life insurance policy is one of the most important financial milestones you’ll have to consider. Depending on your situation, credit life insurance may be the best student loans, mortgage, or auto loan management plan for you.
Wesley LLC can help manage your mortgage loans, life insurance, investments, and accounts – if you’re feeling confused and overwhelmed, book a consultation today!