Life can be expensive and having to pay off expenses like school fees, insurance, and sometimes even debt, can be difficult and worrying.
If you are concerned about paying off debt after you die—like your credit card or a mortgage—then you should perhaps consider a credit life insurance policy.
This is a policy that will help you settle a debt if you die before paying it off. However, the lender will usually be the beneficiary of this policy.
In this article, we will help you understand what credit term life insurance is, what it covers, and determine if it's the right insurance option for you.
Term life insurance covers you for a set amount of time, like 10, 20, or 30 years. If you die during that time the policy will pay out. If you outlive the term, your beneficiaries don't get any money.
With most insurance policies, the death benefit and your insurance premiums are set to stay the same for the whole time you have it.
The length of your term life insurance should ideally match the length of the debt you're trying to cover. For example, if you're a new parent, you would get a 20-year policy to cover you until your child no longer fully depends on you for financial support.
Most life insurance companies sell term life insurance, so it's also easy to get and compare life insurance quotes online and find the best deal.
If you are looking for the best insurance deals, head over to PolicyScout’s life insurance hub to compare the prices of the best providers.
Death benefit: It's the money–lump sum or otherwise– that gets paid to your beneficiaries if you die while your life insurance policy is in effect.
Beneficiary: The person or entity that you legally designate to receive the death benefit your policy pays out if you die.
Premiums: The amount of money an individual or business pays for an insurance policy.
A credit life insurance policy will pay off a debt—like your credit card or a mortgage—if you die before paying it off and the lender is usually the beneficiary of this policy.
As you pay off the debt, the policy's face value (the amount of coverage you have) goes down. If you die before paying off the loan, the insurance company will pay the rest of the debt.
Getting credit life insurance doesn't offer much protection to the policyholder. However, it does protect the lender a lot.
Lenders are almost always named as the beneficiaries of credit life insurance policies, which means that if you die, the money goes to them and not your heirs.
Most credit life insurance policies are decreasing term policies. This is because as you pay off your debt in monthly installments, the amount of money you owe usually goes down over time.
A type of renewable term life insurance policy with a death benefit that decreases over the term of the policy at a predetermined rate.
One of the main benefits of credit term life insurance policies is that most of them don't require underwriting.
A process where insurers assign applicants a classification based on several factors. Underwriters rate several factors to evaluate risk, such as your:
This is why getting credit term life insurance can be a good idea if you have debt, are sick, or can't get any other kind of insurance. However, it is also the reason why credit term life insurance is more expensive than regular term insurance.
Despite that, if you're a homeowner or have a credit card, this may still be better than having no insurance, because some people can't get standard term insurance because of their health or credit history.
Credit life insurance usually pays off any debt that a borrower still owes when they die and works in the following way:
As part of their monthly loan payment, the borrower will pay a fee that allows the lender to be paid in full if the borrower dies before they pay off their loan.
During the next step, the borrower’s estate gets the title to the underlying asset free and clear of extra charges.
Finally, the beneficiaries of that estate get the title to that same asset.
A lot of people take out credit life insurance when they get a car loan or a home loan. For example, if you and your spouse own a home and you both owe money on the mortgage when one of you dies, your credit life insurance will cover the rest of the debt on the mortgage.
If your primary issue is debt inheritance, you generally don't need credit life insurance. Because with these policies, your debt isn’t usually passed on to your heirs when you die.
Instead, your estate uses your assets to pay off your debts. If you don't have enough money to pay off your debt, it usually goes unpaid, and family members aren't required to help or pay the remaining amount.
However, an outstanding loan might often have a negative impact on the policyholder's estate planning. In the following instances, life insurance can be beneficial:
You don’t want your estate to pay your debts. The asset you borrowed money for, such as a car or a house, could be sold to repay the lender when you die. This could lower the amount of money left to your heirs. If you die, your loan insurance will cover any outstanding payments, and keep your estate out of debt.
You want to protect cosigners. When you cosign a loan, you are jointly liable for the debt. If you die, credit life insurance pays out any outstanding debt, relieving any remaining cosigners of the burden.
You live in a community property state and want to protect your spouse. Your assets and, in most cases, your debts, are passed on to your spouse in states with community property rules.
Your spouse won't have to pay off the loan if you’ve taken out a credit life insurance policy. Community property laws exist in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
If you are unsure about the benefits of credit life insurance or how it works, send your questions to Help@PolicyScout.com or call us at 1-888-912-2132 to get personalized assistance from one of our skilled PolicyScout consultants.
Premiums for credit life insurance vary by state and are influenced by the size and kind of loan. However, there are two other key factors that can also affect the cost of credit life insurance, usually increasing the cost:
1. Coverage is typically guaranteed, no matter your health status: When insurers don't know your medical history, like with most guaranteed issue life insurance policies, they charge higher rates due to the increase in the risk of insuring you.
Credit life insurance policies aren't always guaranteed. Your eligibility may be influenced by your age, health, and employment status.
A guaranteed issue life insurance policy is a small whole life insurance policy with no health requirements.
Guaranteed issue life insurance does not pay death benefits for the first two or three years the policy is in force, but if the insured dies during this time, the policy's premiums plus 10% interest are returned.
2. Lenders sometimes add your insurance premiums to loan payments: While this may appear to be a good idea, it may end up costing you more. To pay your insurance premiums, you're essentially borrowing money, which increases the amount of interest you pay.
If you need to terminate a credit life insurance policy early, you may be able to cancel your coverage and get a return on your premiums.
However, lenders have different cancellation conditions. If you've paid off the majority of your loan and don't want to keep paying high premiums for less coverage, the opportunity to cancel your policy may be the right option for you.
It's a smart idea to look at the terms and conditions of your policy before your sign up. Find out what the cancellation process is and before you buy a policy, find out if you can cancel it and, if so, whether you can get a return on your premiums.
Final expense insurance is a type of whole life insurance with a smaller coverage amount and less strict criteria for qualification.
However, it works in the same way as other types of permanent life insurance. A person with a final expense life insurance plan pays their insurer a monthly or annual premium. In return, they get financial coverage known as a death benefit.
Compared to other term and permanent life insurance, a final expense policy is an affordable way of getting life cover to pay for final expenses such as outstanding debts, taxes, and burial costs.
These policies cost less than other types of life insurance and usually don’t require a medical exam, which makes them easier to get.
Some final expense plans even offer a cash value component, which is a living benefit that policyholders can use.
Whole life insurance, also known as traditional life insurance, are policies that have fixed premiums and guaranteed death benefits that will not change throughout a person’s lifetime.
Even if the policyholder encounters financial difficulties, they will have to continue paying the unchanging premiums or change their death benefit amount in order to keep the insurance.
A savings or cash value component is also included in whole life insurance plans. These allow policyholders to accumulate cash in their policy that they can spend in a variety of ways.
A policyholder can build up a cash value by paying extra money on top of their monthly premiums. They can invest, borrow, or spend this money.
If a term life insurance policyholder outlives their plan, a whole life insurance plan may be a good option to convert to if they are wanting insurance for the rest of their life.
However, this option is often more expensive than a term life insurance policy and it is typically easier to purchase when the policyholder is young and healthy.
Group life insurance is a type of insurance that covers multiple people under one plan. They are usually offered by companies, trade associations, professional associations, and unions.
For example, if you join a new company, they might offer group life coverage as an employment benefit.
Similarly, if you join a professional organization, you may be offered the opportunity to be part of their group life insurance plan.
The company can either cover the entire cost of group life insurance or subsidize a part of it.
Depending on your company and their chosen plan, employees can get coverage anywhere from $50,000 to double their annual salary.
If you have debt, are sick, or can't get any other type of insurance, credit term life insurance may be a viable option.
However, it is also the reason why credit term life insurance is more expensive than regular term insurance.
If you’re still unsure about credit term life insurance or other life insurance term lengths, head to PolicyScout’s life insurance hub.
Our professionals are ready to help you understand costs, enrollment options, different plans, and coverage for the many different types of life insurance.