Answering your questions on the cost, pros, and cons of credit life insurance for your debts.
If you’ve contemplated retirement or begun to write your will, you’re definitely familiar with life insurance. Essentially, these are policies that you contribute to over the course of your lifetime so that upon your death, your family is given a lump sum of money that can help them face financial hardship, buy a house, or afford a college education.
But what about paying off debts? Enter: credit life insurance.
What is Credit Life Insurance?
In simple terms, credit life insurance is a type of life insurance policy that is designed to pay off the insurer’s debt after they pass away. It is typically sold by banks when you purchase your mortgage, or as a line of credit when you take out a loan for your car, because the policy will pay off your loan in the event that you die before the debt is paid off.
In fact, credit life insurance doesn’t protect the buyer as much as it protects the lender. When you die, your debts aren’t automatically inherited by your heirs. While this is a risk that banks take on, this is also why they offer credit life insurance. Your premiums remain the same throughout the length of your policy — regardless of the loan size — and the debt payout goes to your lender, not your heirs, when you die.
While some lenders may require credit life insurance, it is not always mandatory and some states have maximum coverage limits for credit life insurance policies, too. For example, credit life insurance policies for mortgages in New York typically can’t exceed $220,000. Therefore, if your mortgage is $440,000, your credit life insurance policy may only cover half of the loan.
How Much Does Credit Life Insurance Cost?
On average, credit life insurance costs more than life insurance policies. This is because coverage is guaranteed, regardless of your health, so you won’t be charged a higher premium — even if your medical history puts you at higher risk of disability or death (which means that the lender is at a higher risk).
As a result, the ensuing risk bumps up the cost of credit life insurance. Moreover, while a life insurance policy would require you to take a medical exam, you don’t need one for credit life insurance because it is the balance of your loan that is being insured, not your lifespan.
Credit Life Insurance: Is it Right for You?
If your main concern is unintentionally passing on debt after you pass, you don’t need credit life insurance. Your debt rarely passes to your heirs when you die, since your estate settles your debt with the assets you own. Your “estate” essentially means all of your assets, so your car, your home, your physical possessions, your bank accounts, etc. Everything you own is considered your estate, so you don’t need to be particularly wealthy or own a mansion to have an estate at the time of your death.
So, if you don’t want the assets from your estate to pay your debts — say you want your heirs to live in the house you built — then credit life insurance may be worth investing in since typically, assets like a car or a house would be sold to repay your existing debts.
You might also want credit life insurance if you want to protect co-signers. When you co-sign a loan, you are just as responsible for any debt as your co-signer. With credit life insurance, your outstanding debt can be paid off by the lender, relieving your co-signer of any burdens.
On the other hand, if you don’t need to insure a single loan, like a mortgage or auto loan payment, then other types of insurance — like life insurance — may be a better option. If you want to cover multiple debts, or a child’s college tuition, then a larger amount of insurance is more apt for your situation.
You also cannot always cancel a credit life insurance policy. You may be able to receive a refund on your premiums through some lenders, but not all, so ask if you can cancel coverage early before you buy a policy. Make sure to also find out what type of refund policy, if any, is available. Moreover, remember that credit life insurance always is paid to your lender, not your family, so while your family can certainly be left with money from other sources after your pass, it may still be worth considering other options.
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Keertana Anandraj is a recent college grad living in San Francisco. When she isn’t conducting international macroeconomic research at her day job, you can find her in the spin room or planning her next adventure.
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