What Is Credit Life Insurance?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What is Credit Life Insurance?

Credit life insurance is a type of policy designed to pay off a borrower’s debts if the borrower dies. It’s typically tied to a specific loan or credit agreement.

Credit Life Mortgage Insurance

Credit life mortgage insurance specifically covers the balance of a mortgage. If the policyholder passes away before the mortgage is paid off, this insurance pays the remaining amount directly to the lender, not to the policyholder’s family.

What Type Of Life Insurance Are Credit Policies Issued As

Type of Life Insurance for Credit Policies

Credit policies are usually issued as decreasing term life insurance. This means the policy’s payout decreases over time, typically in line with the declining balance of the loan.

Examples

  1. John takes a $100,000 mortgage with a credit life policy. If he dies when $50,000 is still owed, the insurance pays off that $50,000.
  2. Sarah has a car loan with a credit life insurance policy. If she passes away, the policy pays off whatever amount is left on her car loan.

Related Reading: What Is a Collateral Assignment of Life Insurance?

Benefits and Considerations

  • Debt Protection: Ensures debts are not passed to family members.
  • Peace of Mind: Borrowers know their debts will be taken care of.
  • Cost: Can be more expensive than standard life insurance.
  • Decreasing Value: The policy’s value decreases as the loan balance decreases.
Credit Life Mortgage Insurance

Comparison of Credit Life Insurance and Standard Life Insurance

FeatureCredit Life InsuranceStandard Life Insurance
PurposePay off specific debtsProvide financial support to beneficiaries
Payout RecipientLenderPolicyholder’s beneficiaries
Policy ValueDecreases over timeFixed or increasing
CustomizationLimitedHigh (various riders and options)

Conclusion

Credit life insurance is a specialized form of life insurance aimed at protecting borrowers by paying off their debts if they pass away. It’s typically a decreasing term policy, with the payout designed to match the declining balance of a loan. Understanding the differences between credit life insurance and standard life insurance can help borrowers make informed decisions about their financial protection needs.

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Frequently Asked Questions

What type of life insurance are credit policies issued as?

Credit life insurance policies are typically issued as a type of term life insurance. These policies are designed to pay off a specific debt, such as a mortgage, car loan, or credit card balance, in the event of the policyholder’s death. They are often offered by lenders as an option to borrowers to provide financial protection for their outstanding debts. Unlike traditional term life insurance policies, which offer coverage for a specified term and payout to beneficiaries, credit life insurance policies typically have coverage amounts corresponding to the outstanding debt amount and are payable directly to the lender.

What is credit life insurance?

Credit life insurance is a policy that assures borrowers have their loans repaid in full should they pass away before they can make payments. This coverage is entirely optional and voluntary – you can choose! When opted into this service, any associated charges are added to your principal amount loan payment. With credit life insurance, rest assured that if anything happens to you financially or otherwise during your loan agreement, this policy will still cover it.

Why do people want credit life insurance?

A credit life insurance policy could protect your loved ones from being saddled with debt in the unfortunate scenario of your death. In addition, this policy offers financial assurance that any outstanding obligations will be taken care of without providing them with a direct payout or death benefit.

Is it usually a good idea to purchase credit life insurance?

Credit life insurance may be the perfect solution if you need decreasing coverage as debt is paid off. Additionally, if medical exam requirements don’t permit regular life insurance policies to be purchased, this could also work for you. No matter which scenario applies best to your situation, credit life insurance provides an economical and accessible way to obtain protection that meets both short-term and long-term needs.

Why is credit life insurance not such a good deal?

Credit life insurance doesn’t benefit you but safeguards your lender. For example, if death occurs before repayment of the loan is complete, the insurer pays off whatever balance remains. As a result, premiums remain consistent throughout the policy period, no matter how much money is still owed on loan.

What is most commonly used in credit life insurance?

Whole life insurance policies are typically the most favored type of credit life coverage, but term life insurance plans can also be implemented.

Is credit life expensive?

For those who don’t need to pass a health test, the cost of credit life insurance can be significantly higher than term life. To illustrate, an ordinary 40-year-old needing $50k in coverage would pay only $92 for the term but an astonishingly high amount of $370 for credit life.

What is the difference between credit life insurance and life insurance?

No, not really. Life insurance policies are designed to help ease the financial strain of a family in case of the death or illness of their primary breadwinner. On the other hand, credit life is provided by lenders for an individual’s existing debt and can be claimed if you become disabled, are laid off from work, or die.

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost to you if you purchase a policy. It helps us keep the lights on!

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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