What is credit life insurance?
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Living with debt can be daunting at times. And while many of us would like it to be different, not all our debts disappear when we pass away. People use various strategies to deal with this financial burden, ranging from frugal living to extensive savings. Many people, though, make use of insurance to keep this weight of debt from passing on to their estate or loved ones after they die. One type of insurance used for this is called credit life insurance. But how do we define credit life insurance?
What is credit life insurance?
Credit life insurance is a type of life insurance policy that provides coverage for outstanding debt when the insured individual passes away. With some of these plans, the face value of your loan determines the size of the policy. In those situations, the value of a credit life insurance policy is equivalent to the amount of unpaid debt left on the loan.
These policy types are designed to protect the lender from financial risk and, as such, they make the payout to the lender. While this means your beneficiaries will not get a payout from these policy types, it can also keep your estate from being responsible for an outstanding debt when you pass.
Who needs credit life insurance?
Credit life insurance isn’t for everyone, but some can benefit from it. These policy types aren’t the only way to secure your estate and heirs against debt, but it can be particularly useful in the scenarios discussed below.
You have taken out a business loan
Business loans are often large, and they tend to put you in a position of vulnerability. People take out these loans to grow their business and increase their profit, all while still managing to pay off that debt. Suppose the borrower passes away before it’s paid off and the business is dependent on them – in that case, it can leave their family or estate in a challenging situation. A credit life insurance policy can mitigate this danger.
You are cosigned on a loan
If you are cosigned on a loan, you and the other signer share equal responsibility towards that debt. If one of you dies, then the other one still has to continue paying off the loan. However, if there is a credit life insurance policy on the loan, it will be paid off upon one of the co-signers’ death.
You want to keep your estate clear of debt
One way or another, credit life insurance is about preventing the transfer or continuation of debt. Whatever your reasons, if you want to keep a particular loan from indebting your estate after you die, then a credit life insurance policy is worth considering.
You live in a community property state
There are a few states that are community property states. In these states, all property owned by one spouse is owned equally by the other spouse. This includes finances and debt. Communal property states include Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico and Wisconsin. Your spouse will be responsible for your debt in these states after you pass.
What does credit life insurance cover?
Credit life insurance covers the outstanding debt of the loan that it was taken out to insure. Each credit life insurance policy only covers one loan. These loans are protected against the remaining outstanding balance and make their payout to the lender.
|Outstanding debt on a specified loan||Other outstanding debts|
|Payout to the lender||Payout to the borrower|
How much does credit life insurance cost?
An accurate answer to how much does credit life insurance cost can be complicated. The cost of a policy depends mostly on the size and type of the loan. However, insurance companies may use other variables to help them determine rates. In general, though, credit life insurance does tend to be more expansive than traditional life insurance. This is due, in part, to the increased financial risks that insurance companies assume by offering credit life insurance as a guaranteed issue product. Meaning that the validity of the policy is based solely on premiums and not on issues such as the applicant’s health.
With smaller loan amounts, credit life insurance policies can be cheaper than term life for their coverage. However, as the loan size and coverage amount grow, credit life premiums become disproportionately expensive compared to term life insurance premiums. On average, credit life insurance premium costs are around $1.50 per every $200 of loan coverage, as extrapolated from the Wisconsin Department of Financial Institutions:
|Age||Annual cost (per $50,000 of loan coverage)|
*table and data sourced from the
How to get credit life insurance
Sometimes it is offered along with the loan. If the lender doesn’t recommend a credit life insurance policy, ask if they offer these policies, or if they partner with a company that does. Otherwise, you can apply for credit life insurance from any applicable insurance company. The overall process will follow the steps outlined below:
- Have a loan. Before a credit life insurance policy can exist, there has to be a loan to insure. That’s why the first step is taking out a loan. However, if you already have a loan, you can still apply for credit insurance on it.
- See if the lender offers insurance. Whether dealing with a new loan or an old one, you might be able to get a credit insurance policy directly from your lender. This may not always be the cheapest option, but it is usually the most convenient. If your lender does not offer these policies, then move on to the next step.
- Assess your policy and provider options. Compare policy options, considering both what your lender offers and what is provided by other companies. This step involves a bit of research, as you need to find and compare multiple insurance companies to get the best rates.
- Apply for a policy. Once you’ve determined who you will be purchasing the policy from, it’s time to apply. Unlike traditional life insurance, these plans are guaranteed issue, which means that they are dependent on your premiums being paid and not on your medical information. Credit insurance policies do not require medical exams or other personal data of that nature.
- Pay the premium. With your plan chosen and applied for, wait for the company to accept your application. Once they do, make your first premium payment. As soon as they receive the payment, your policy will be in effect. As long as the premiums are paid, and the covered debt exists, the plan will remain in force.
There are a few companies that offer credit life insurance companies
Can a credit life insurance policy be canceled?
You can cancel a credit life insurance policy at any time, but there are some nuances to it. Many of these policies will have a small window after activating, around 10 to 15 days, wherein you can cancel them for a complete refund. Outside of that grace period, cancelations will not generally provide refunds. When you cancel your policy, it will cease to be in force, and you will no longer be charged the premiums for it. While this cancelation won’t hurt your credit, it may involve fees, and it will result in you losing your coverage from that policy.
What are some alternatives to credit life insurance?
Credit life insurance can keep a loan from indebting your estate if you die. Still, there are other ways to safeguard your estate and family. Which approach works best for you will depend on your situation and the resources available to you.
Consider a term life insurance policy
Across life insurance types, credit life insurance doesn’t offer the best ratio of premium cost to coverage amount. This is one of the main arguments for taking out a term life insurance policy instead. Because the payouts from these policies don’t have to be used in a restricted way, they can be used to pay off outstanding debt. As an upside, the payout from these plans can be used for something else if the outstanding debt is resolved before your death.
Save or invest money
While this may be the most challenging method, you can set aside enough money to cover your outstanding debts when you pass away. This method requires having enough disposable income to make it work, and the budgeting discipline not to spend it. In balance with being the most difficult, this method is also the most cost-effective overall. If you choose to invest instead of using a savings account, be careful, as investments can be a risky prospect and rarely offer guarantees.
Review current life insurance
It’s possible that you could use an existing life insurance policy without needing to take out any new plans. If your lender requires proof of coverage, they may allow you to use a current life insurance policy. Acceptance of this varies between lending companies and is, for that reason, the least reliable of these methods.
- Credit life insurance covers outstanding debts.
- Each policy applies to a specified loan.
- These plans pay out to the lender and not the borrower.
- Term life insurance is often a cheaper alternative.
Credit life insurance can be a wise choice in the right situation. If you’re looking to protect your spouse or your estate from an outstanding debt, or if you’ve co-signed a loan, these policies offer financial protection. However, it is often cheaper per dollar of coverage to take out a term life insurance policy instead. Whatever approach you choose, making sure you have a plan in place for debt is always a good idea.