Unfortunately, your debt doesn’t die with you — a credit life insurance policy protects your loved ones from dealing with your debt when you’re gone. But it only pays off one loan, and you can’t choose your beneficiaries.
What is credit life insurance?
Credit life insurance has one purpose: To pay off a specified debt if the policyholder dies prematurely.
This coverage is usually offered by banks and lenders and issued by an insurance company they partner with. It’s typically tied to a major loan — such as a home, car or personal loan.
How does credit life insurance work?
With credit life insurance, the lender is the sole beneficiary — not your loved ones. If you die, the insurer will pay out the proceeds to the lender to settle your debt.
The face value of the policy is equal to the balance of your debt. For example, if you have $100,000 left on your home loan, you can qualify for a credit life insurance policy worth $100,000 — no more, and no less.
As you pay down the loan over time, the face value of your policy decreases until they both have zero value. In simple terms, your credit life insurance policy expires once you’ve cleared your debt. And if you die before the debt is paid off, the lender receives the money to cover the remainder of the loan so your family won’t have to worry about paying it back.
How do I pay credit life insurance premiums?
In most cases, your lender will roll your premium into your monthly loan payment.
Do I need credit life insurance to secure a loan?
No. Credit life insurance is completely voluntary, so you don’t need to purchase a policy from a lender to lock down a loan.
It’s also illegal for lenders to base their loan decisions on whether or not you buy a credit life insurance policy.
If your lender pressures you to purchase credit life coverage or adds the cost of a policy to your loan payments without your consent, you can report it to the Federal Trade Commission.
What’s the difference between credit life insurance and traditional life insurance?
There are two major differences between these policies: The beneficiary, and how the death benefit is structured .
With a traditional life insurance policy, you can choose your beneficiaries — and allocate the percentage of the proceeds you’d like to go to each. Your beneficiaries can then spend the money however they want.
You can also purchase as much or as little coverage as you like, and the death benefit stays the same for the life of the policy. This differs from credit life insurance, where the value of the policy is determined by the loan it’s designed to pay off.
What are the benefits of credit life insurance?
Credit life insurance can be a useful estate planning tool. These are its key advantages.
Pays off your debt when you die
Usually, an executor is appointed to your estate when you die. This may involve selling off your assets to repay any outstanding debts.
Since a credit life insurance policy is dedicated to paying off a major debt, it can simplify the process — and potentially leave more assets to pass on to your loved ones from your estate.
Protects cosigners, joint account holders or spouses in community states
Without a life insurance policy in place, your family or loan cosigners might be responsible for paying off any shared debts if you die.
If you’ve taken out a loan with someone else or share a bank account, a credit life insurance policy could protect them financially in the event of your death.
It can also ease the financial burden on your spouse if you live in a community property state.
In these states, your spouse acquires your debt when you die — even if it’s not in their name:
- New Mexico
However, a regular life insurance policy can also give your cosigner, joint account holder or spouse the money they need to settle your debt — and it’s usually cheaper.
No medical exam required
Credit life insurance isn’t medically underwritten, which means you don’t need to fill out a health questionnaire or take a medical exam. Because of that, it can be easier to qualify for coverage — especially if you have a health condition or a family history of health conditions working against you. And unlike traditional life insurance policies, your health won’t have an effect on your premium.
If you’re worried about a pre-existing condition, a no-medical-exam life insurance policy might be a better option to pay off debts and get money in the hands of your beneficiaries.
No tax implications
Since your lender is the beneficiary, there’s no risk of your policy payout being reduced by taxes.
With traditional life insurance, the proceeds of your policy may be subject to federal estate taxes if your estate is worth more than $11.58 million — the IRS threshold for 2020. And they might be subject to inheritance taxes if you lived in Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania.
Since most people don’t fall under this large estate category, regular life insurance is usually the best option.
Is credit disability insurance the same thing?
No. Credit disability insurance covers your loan repayments if you become disabled and can’t work for a specified period of time.
It’s typically limited to a set number of installments, or ends once a certain amount of the loan has been paid.
What to watch out for with credit life insurance
While credit life insurance can make it simpler to clear debt upon your death, it has its limitations.
More expensive than term life insurance
Credit life insurance is open to all borrowers, and approval is guaranteed. Since the insurer doesn’t have a complete picture of the person it’s insuring, it typically charges a higher rate.
To compare, the price of traditional life insurance policies is based on the risk you pose to the insurer. If you’re healthy and comfortable with taking a medical exam, you could save hundreds or even thousands of dollars in premiums by opting for a regular policy instead.
Premiums are rolled into your loan payment
Though this makes it easier to manage your policy, it also means your term length is tied to the loan term. If you need coverage for a longer period of time, you’ll need to take out a separate life insurance policy.
Face value decreases over time
With most policies, the face value of your credit life insurance policy declines as you pay off your loan —but the premium doesn’t change. This means you may end up paying the same premium for less coverage as time passes.
Only linked to one loan
Credit life insurance isn’t designed to wipe out all of your debt. It’s linked to one particular debt, such as a mortgage or car loan.
If you have multiple outstanding debts, you may want to take out a traditional life insurance policy. That way, your loved ones can use the funds to clear a different debt, or more than one debt.
Your beneficiaries won’t get any money when you die
The proceeds of your policy go directly to your lender, so your family won’t see any of the funds.
If you’re hoping to leave money to your loved ones, you’re better off buying a more flexible life insurance policy.
How do I get credit life insurance?
When you apply for a loan, the bank or lender may offer a credit life insurance policy. Otherwise, you can buy a policy through an insurance company.
Which insurance companies offer credit life insurance?
A handful of insurance companies sell credit life insurance policies, including:
- American AgCredit
- American National
- J.T. Miller Company
- Protective Life
- Securian Financial
As for what type of life insurance are credit policies issued as, they’re usually term life insurance policies with an end date that matches your loan.
Who should buy credit life insurance?
Credit life insurance is best suited to those with one major, cosigned debt — like a mortgage. It can prevent the other borrower from having to make loan repayments if you die, and dipping into other assets to settle your debt. For that reason, this type of coverage makes sense for breadwinners whose families wouldn’t be able to pay off the loan in their absence.
This policy is also ideal for seniors over the age of 60 or people with pre-existing health conditions that disqualify them for traditional life insurance.
But if you’re relatively healthy or want to leave a financial legacy, it’s worth looking into life insurance instead. It’s flexible in that you can choose your coverage amount, term and beneficiaries — and they can spend the money however they choose.
If you don’t want traditional life insurance but want to avoid a medical exam, explore simplified issued or guaranteed issue life insurance.
Compare life insurance alternatives
Credit life insurance is a specialized policy that pays off one debt if you die, and your premiums aren’t tied to your age, health or lifestyle. While it can protect cosigners and joint account holders, it’s pricey — and a life insurance policy can achieve the same goal for less.
If you’re looking for more flexible coverage, compare life insurance companies.