Credit life insurance is a type of insurance policy that exists solely to pay off an outstanding debt if you die. When you take out a large loan, like a home or car loan, your lender may offer you a credit life insurance policy that covers the value of the loan. In the event of your untimely death, this policy would pay the lender back so your loved ones don’t have the burden of making these large loan payments. This overview can help you decide if a credit life insurance policy is right for you.
what is credit life insurance?
first, credit life insurance is not life insurance, says kevin lynch, assistant professor of insurance at the american college in bryn mawr, pa. credit life insurance and life insurance are two completely different types of coverage. Simply put, credit life insurance is an insurance policy taken out by the borrower for the benefit of the lender. “It can be a bit confusing,” Lynch says. “Even though they are two very different products, they often achieve very similar results.” Of course, it doesn’t help that the names are similar. Credit life insurance is also completely different from permanent life insurance, which is designed to last for the duration of your life.
Adding to the confusion, “credit life” is also a marketing slogan used with standard life insurance policies, with insurance agents suggesting that regular life insurance is a way to pay the mortgage. According to Tim Gaspar, CEO of Gaspar Insurance in Encino, Calif., that slogan, which has nothing to do with the nature of the policy, usually means the consumer will end up paying more. “If you’re in the life insurance market and you hear that term, you should look elsewhere,” Gaspar says.
what does credit life insurance cover?
Credit life insurance typically covers any remaining debt a borrower has on a large loan. In a typical policy, the borrower will pay a premium, often included in the monthly loan payment, which allows the lender to receive full payment if the borrower dies before paying off the loan. Title to the underlying asset passes freely and clearly to the borrower’s estate and ultimately to the beneficiaries of that estate.
According to Lynch, credit life insurance is commonly offered with auto loans and home loans. For example, if you and your spouse owe a mortgage on your home, a credit life insurance policy could cover the remaining debt on that mortgage if one or both of you die before the loan is paid off. this type of protection could be especially helpful if the remaining spouse relied on both incomes to cover loan payments.
how much does credit life insurance cost?
While credit life insurance rates will depend on the loan amount, credit life insurance policies can cost more than traditional life insurance. There are multiple factors that affect the cost of a credit life insurance policy, including the type of credit, the type of policy, and the amount of the loan.
“Usually it’s a little bit more with credit life insurance because there’s a higher risk associated with the product and that leads to higher premiums,” Lynch says.
That increased risk comes into play because credit life insurance is what’s known as a guaranteed issue product, meaning eligibility is based solely on your status as a borrower. Unlike most life insurance policies, the applicant won’t be required to take a medical exam or reveal health details because it’s the loan balance that’s insured, not the borrower’s life, Lynch says. .
things to consider before buying credit life insurance
Because credit life insurance can cost more than regular life insurance and is intended to benefit the lender, there are a few things to consider before purchasing.
You may want to consider purchasing credit life insurance if:
- You want to pay for coverage that is dwindling as you pay off your debts. this is a good option as you will pay less and less protection each month.
- You are unable to purchase life insurance through regular channels due to the medical exam. credit life insurance will not require a medical exam.
- if you can’t qualify for enough life insurance to cover the outstanding debts you may leave behind. credit life insurance will help you cover debts so that your loved ones are not responsible for them.
Does credit life insurance require a medical exam?
Do you owe taxes when your credit life insurance pays off your debt?
Are there exclusions to credit life insurance?
How much credit life insurance do I need?
Is there a maximum amount of credit life insurance I can buy?
credit life insurance and taxes
When it comes to taxes, the consumer has little to worry about with credit life insurance, says cpa ryan s. himmel, founder of bidawiz, an online service in new york that connects consumers with financial professionals.
“Since the proceeds from the insurance policy go directly to paying down the debt,” says himmel, “and the insurance provider is essentially the beneficiary of the policy, not family members, there would be no implication for estate or inheritance tax.”
If you or your spouse died while having a credit life insurance policy, the survivor would not be required to pay any taxes on the policy payment covering the insured debt. For example, if a couple has a credit life policy on their home loan and one of them dies, the policy will eliminate their obligation to pay more on that loan. this process will not require them to pay any new taxes.
alternatives to credit life insurance
Credit life insurance is not the only option to insure your debts in the event of an untimely death. People who don’t want to get credit life insurance may want to consider one of these alternatives:
term life insurance
Term life insurance can be a good option for those who only want coverage for a limited period of time and who have debts that must be paid if something were to happen to them. Term life insurance is commonly offered in terms of 5, 10, and 15 years, but can be offered in longer terms, such as 20 or 30 years. A term life insurance policy is generally less expensive than a credit life policy as well.
If you can cover your debt with money in an existing savings or investment account, credit life insurance may not be required by your lender. ask your lender if this is an option for you. Keep in mind, however, that if you use that account for other purposes and the balance falls below the amount you need to cover that loan, your estate may still be responsible for the loan balance if you die.