Life Insurance with a Credit Score

Anyone who has ever applied for a personal loan, vehicle loan, or mortgage may have been given credit life insurance at one point or another. This alternative, however, should not be confused with standard life insurance.

One of the reasons why many individuals choose credit life insurance is because it can be used to pay off the entire debt balance or a portion of the debt balance if you pass away.

While this is an appealing insurance option, it may not be the greatest fit for your needs. As a result, it’s usually a good idea to think about a variety of things before buying credit life insurance.

What Is Credit Life Insurance?

It’s a kind of insurance coverage designed to pay off the remaining balance of any outstanding debt of an individual if they pass away.

Credit life insurance is a type of life insurance policy designed to pay off a borrower’s outstanding debts if the borrower dies. The face value of a credit life insurance policy decreases proportionately with the outstanding loan amount as the loan is paid off over time until both reach zero value.

The policyholder will be required to pay a premium, which is often included with the monthly loan payment. However, it is not a one-size-fits-all option, even though many banks and lenders offer it.

How Credit Life Insurance Works

When you take out a loan, whether it’s a mortgage, a car loan, or a line of credit, you’ll usually be offered credit life insurance. In the event that the borrower dies, the policy pays to repay the loan.

If you have a co-signer on your mortgage, credit life insurance will shield them from having to make loan payments after you pass away. If you’re the principal breadwinner and your loan co-signer would struggle to make payments if you died, such plans are worth considering.

In most circumstances, heirs who aren’t co-signers on your loans aren’t compelled to pay off your obligations when you pass away; debts aren’t usually passed down. Only a few states recognize the communal property as an exception, and even then, only a few.

When banks loan money, part of their accepted risk is that the borrower might die before the loan is repaid. In reality, credit life insurance is protecting the lender, not your heirs. In fact, the payout on a credit life insurance policy goes straight to the lender, not to your heirs.

What Does Credit Life Insurance Cover?

Credit life insurance offers coverage for debt repayments in the event of disability, unemployment, or death of the policyholder. Of course, the exact benefits depend mainly on the specific circumstances of the individual and the policy type. 

It is important to note that credit life insurance is completely different from permanent life insurance and credit involuntary unemployment insurance (IUI). The latter makes payments on your credit obligations when you lose your full-time job through no fault of your own.

Some examples of involuntary unemployment include layoffs, involuntary termination of employment, strike, and unionized labor dispute.

Another quiz question for you: Credit life insurance is typically issued with which of the following types of coverage?

  1. Annual Renewable Term
  2. Whole Life
  3. Group Term
  4. Decreasing Term

Credit life insurance is normally issued at a decreasing term. The face amount of the coverage declines as the loan amount gets reduced by the borrower’s payments.

Credit Life Insurance Benefits

No Exam Insurance

One of the benefits of credit life insurance is that it requires no medical exam at all. It covers the loan, not the individual, so you shouldn’t worry about the state of your health. 

Anyone Can Be Insured

Another major advantage of credit life insurance is that it does not consider factors such as the lifestyle or the general health of the individual.

In other words, if you don’t qualify for conventional coverage for some reason, credit life insurance can be the ideal option to ensure that all of your outstanding loans are paid off in case something happens to you.

Why Should You Consider Credit Life Insurance?

Credit life insurance is an option to consider whenever you take out a large loan to purchase a home or a car.

It Prevents Your Loved Ones from Financial Hardship

One of the reasons why credit life insurance is a good choice for many folks is that it safeguards your loved ones from any financial obligations if you pass away.

Decreasing Face Value

Furthermore, a credit life insurance policy‘s face value decreases in proportion to the outstanding loan amount as the policyholder pays the loan over a certain period of time. This continues until both values reach zero.

It Gives You Peace of Mind

Credit life insurance can be a great option if, for whatever reason, you are not able to obtain a standard life insurance policy and are worried about what will happen to your heirs in case you pass away.

What Types of Credit Life Insurance Are There?

There are a few different types of credit life insurance designed to protect your assets against other types of risks besides early death. They are: 

  • Credit life disability insurance – protects borrowers from defaulting on their loans if they become disabled and unable to work.
  • If you lose your work due to no fault of your own, credit involuntary unemployment life insurance makes payments on your credit commitments.
  • Credit property insurance protects the assets used to collateral the loan, such as a boat or automobile.

How Much Does Credit Insurance Cost?

Typically, credit life insurance rates depend on the loan amount. Moreover, such factors as the type of credit and the type of policy affect the credit life insurance quote.

However, due to a greater risk associated with the product, credit life insurance will cost more than a traditional life insurance policy. The risk comes into play because credit life insurance is a guaranteed issue product.

Furthermore, you can always use a credit life insurance calculator to calculate the approximate amount of coverage you need. 

What Should I Consider Before Buying a Policy?

There are several factors to consider before purchasing a credit life insurance policy:

  • What is the cost of the annual premium?
  • Will credit life insurance cover the entire term of my debt as well as the total amount owed?
  • What are the boundaries? What are the exceptions to the rule? (What is and is not covered.)
  • Is there a time limit before my insurance coverage kicks in?
  • Is it possible to pay the payment monthly rather than borrowing the complete amount as part of my loan?
  • Is it possible to finance the premium as part of the loan?

Also, while there is no universal rule regarding age limitations on credit life insurance policies, in some circumstances, the policy ends when the borrower reaches the age of 70.

Credit for Life Insurance and Taxes

Since the insurance policy premiums go directly toward paying off the debt, and the insurer is the policy’s beneficiary, there wouldn’t be any implications for the estate or inheritance tax.

In other words, as far as taxes are concerned, there is little for the consumer to worry about with credit life insurance.

Alternatives to Credit Life Insurance

The following are some alternatives to credit life insurance. However, all of these options come with their pros and cons that have to be weighed before the purchase. 

Can You Cancel Credit Life Insurance?

The easy-to-understand and straightforward cancelation policy is another reason why credit life insurance is considered a great option in many circumstances. 

So, for those wondering if they can cancel credit life insurance, the short answer is yes. Individuals are allowed to cancel it at any time and may also be eligible for a full or partial refund. But, it will mainly depend on the rules and regulations of the insurance provider.

Is Credit Life Insurance a Good Idea?

Among many benefits of a credit life insurance policy, the major one is that it helps safeguard co-signers of a large loan from having to pay the remaining amount to the lender in instances when the policyholder dies. In addition, age or health concerns are not considered when it comes to eligibility for a credit life insurance policy.

So, if you’ve been worried about that, or for some reason, you don’t qualify for a standard life insurance policy, credit life insurance could be a possible solution for you.

Do you need credit insurance?

While credit life insurance is sometimes built into a loan, requiring it is against federal law. Basing loan decisions on the acceptance of credit life insurance is also banned.

What is the aim of credit life insurance?

Protection of heirs from being saddled with outstanding loan payments in the event of your death is the main goal. It’s especially important if your spouse or someone else is a co-signer on the loan in order to protect them from having to repay the debt.

It also protects your spouse or heirs in states where heirs aren’t protected from a parent’s outstanding debts.

The Bottom Line

Credit life insurance pays off a borrower’s debts if they die. You can generally purchase it from a bank at a mortgage closing when you take out a line of credit or get a car loan.

This type of insurance is especially important if your spouse or someone else is a co-signer on the loan in order to protect them from having to repay the debt. It also protects your spouse or heirs in states where heirs aren’t protected from a parent’s outstanding debts.

FAQs

Do you owe taxes when your credit life insurance pays off your debt?

Typically, an individual will not owe taxes when their credit life insurance policy goes into effect to cover their loan.

What does credit life insurance cover?

Credit life insurance provides debt protection in case the borrower dies. It is commonly offered with home and auto loans.

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