Credit life insurance is a form of insurance policy that is used to settle the debts of a borrower when he or she passes away. It basically protects your spouse from having to settle your debts with their money or your estate.
Typically, the monetary value of a credit life insurance goes down as the debt is paid off over time. When there is no more debt, the credit life insurance becomes zero as it has no debt to clear.
How credit life insurance works
Credit life insurance is often sold to you when you purchase a mortgage or take some other loan. Now, there is a possibility that you may pass away before paying off your mortgage or loan. If you have a co-signer in the loan, most likely your spouse, then it would fall to them to pay off your debt. But it would be difficult for them if they are not so financially buoyant, especially when you were the breadwinner while you were alive. So this credit life insurance helps to protect your loved one from having to settle your debts with their own limited finance.
However, debts are generally not inherited. Your surviving family members have no obligation by law to pay off your debts with their cash. But there are some states that recognize community property. If you are resident in such a state, your spouse would become liable for your debt when you pass away. In such cases, your credit life insurance protects your spouse.
But the larger protection goes to your lender because the payout from the insurance policy goes directly to your lender, not your survivors. Credit life insurance protects your lender by the fact that they will still get paid in full even when you pass away.
Important Things to Know About Credit Life Insurance
Now, if you are looking to protect your spouse from your debts through credit life insurance, then it is important you familiarize yourself with the policy. Below are 5 important things you need to know about credit life insurance.
1. There is a thick line between credit life insurance and life insurance
From their names, you would think that these two concepts are almost identical. But not so. Their similarity end with the fact that payout is made in the event of death. From there, it is different.
Where life insurance covers the holder and make payouts to their surviving beneficiary, credit life insurance essentially covers the lender and make payout to them. Credit life insurance only protects the spouse in a state that recognizes Community Property, but even then, the money doesn’t go to them but the lender.
2. Credit life insurance is more expensive than life insurance
The risk with mortgages and other large loans is that the borrower may die before settling the lender. But in a life insurance, there is little or no risk. Everyone must one day die.
By the fact that credit life insurance has a graver risk, it is typically more expensive than conventional life insurance.
3. Your credit life insurance may not cover the complete value of the loan
Different states have different laws and limits when it comes to credit life insurance payouts. It is possible that the limit falls below the loan you took. So you should check with your state to ensure you have enough coverage.
4. Credit life insurance is a must with some lenders
There are some lenders you borrow from that mandate you to purchase a credit life insurance policy. In such a case you have no say whether to buy or not. However, this mostly happens when you are putting down less than 25% of the property value. And there is a good side to this: you can cancel the policy after some years when you gain more equity in the property.
5. Knowing whether credit life insurance is for you
Normally, if you are looking to secure your loved ones when you pass away, the norm is to go for a life insurance policy. That’s because the proceeds will go directly to them. But there are some reasons why you may also need a credit life insurance policy.
- If you have obtained a huge loan, credit life insurance covers your loan, and the coverage circumvents exclusion issues.
- Whether you have health issues or not, you can obtain credit life insurance unlike the conventional life insurance.
Although credit life insurance may not be the best way to benefit your loved ones, it’s an excellent way to ensure your debts are paid without involving them.