Credit life insurance is a very unique form of life insurance that will settle the outstanding debts of a borrower in the event of the death of the policyholder. This policy ensures that you don’t leave debt for your loved ones. You don’t want your loved ones to inherit your debts.
This specialized policy is beneficial in seeing to it that a person can pay down a large loan like a mortgage or car loan, as it may help repay a loan if the policyholder dies before they fully repay their loan under the conditions agreed in the account terms.
When you subscribe to credit life insurance, since it has only been designed to cover the outstanding balance on your loan, it will keep dropping in value throughout the policy, as you are expected to pay off your loan the more you live.
While getting a credit life insurance may be a great idea, in the United States, lenders are prohibited from demanding this policy before offering a loan to a prospective borrower. Once you are qualified for a loan, a lender is prohibited by law to not base their lending decisions on the availability of a credit life insurance policy or the absence of one.
How It Works
It’s a straightforward insurance policy that is beneficial to people who borrowed a reasonable amount of money (like a car loan, mortgage, etc) and don’t want to burden their loved ones if they die before paying off the debt. In such an event, a credit life insurance policy will simply pay off the loan, taking pressure off loved ones that depended on the underlying asset, like your house.
If you have taken a loan with a co-signer, like on a mortgage, it is reasonable to obtain a credit life insurance policy that would be a form of security to them if anything should happen to you (death in this case) that prevents you from paying up.
Many lenders may offer a credit life policy when you apply for a loan or credit line, but you have the liberty to either buy it or reject it. But if you are getting a policy, premiums may work in two ways:
Single premium: Its cost is added to your loan principal, and you pay interest on what they borrow.
Monthly outstanding balance: The borrower has to pay premiums monthly, and they have the liberty to either do so in fixed instalments or payments that change based on their balance.
You should always remember that you have the freedom to cancel your credit life insurance policy anytime you want to without being hooked forever. This is important since the face value of a credit life insurance policy typically reduces proportionately with the outstanding loan amount as the loan is settled over time till there is nothing else left to pay as debt.
One of the closest alternatives to credit life insurance is term life insurance, but unlike the latter, credit insurance usually has less stringent health screening requirements and may not even demand a medical exam whatsoever.
Also, unlike a term life insurance policy, the lender is the beneficiary who receives the benefits that are used to take care of the outstanding loan.
Is a credit life insurance policy necessary?
Its core aim is to ensure the protection of your loved ones from being saddled with outstanding loan payments when you die, and it also secures a co-signer on the loan from being asked to repay the outstanding debt.
You don’t need a credit life insurance policy before accessing a loan in the U.S. It is against federal law to be denied a qualified loan product based on the unavailability of credit life insurance, although it may be built into a loan. In such a case, it would increase the individual’s monthly payments, but it’s not always a big deal if you already have your plans sorted out.