When you take out a loan, you intend to repay it over time. But if you pass away unexpectedly, that burden could fall to your family members. To help avoid this problem, you could set up credit life insurance when applying for your loan.
While they may be convenient, such policies do have some drawbacks compared to regular life insurance. Consider how this type of credit insurance works and compares to other options.
Understanding Credit Life Insurance
Credit life insurance is a life insurance policy connected to a specific debt, such as a mortgage, car loan or line of credit. If you die before paying off the debt, the credit life insurance policy pays out a death benefit. The death benefit goes toward paying off your remaining loan balance. That way, your lender gets its money back, and your beneficiaries avoid having to take over repaying the debt.
How Does Credit Life Insurance Work?
Credit life insurance is designed to help pay off a specific debt if you pass away before the loan is repaid. The policy amount typically matches your loan balance. As you make payments on the loan, the insurance coverage decreases in step with your remaining debt.
You’ll usually pay a premium to activate the policy. Some lenders offer credit life insurance as a single premium added to your loan amount. For example, if you borrow $100,000 and the insurance costs $6,000, your total loan amount would become $106,000. Other policies may charge monthly or annual premiums separately from the loan.
This type of insurance is temporary. It ends when you finish repaying the loan - or if you pass away before that point.
What Does Credit Life Insurance Cover?
Credit life insurance is tied to a specific loan. If you pass away, the policy helps pay off the balance of that loan - up to the policy’s coverage limit. Here are some common debts it may cover:
- Mortgages
- Car loans
- Credit cards
- Personal loans
- Lines of credit
Some policies also offer credit disability insurance, which may cover loan payments if you become disabled and can’t work. In that case, the coverage continues until you recover or the loan is paid off - whichever comes first.
Who Is the Beneficiary of a Credit Life Policy?
With credit life insurance, your lender is the policy's beneficiary. If you pass away, the insurer pays the benefit directly to the lender to help cover the remaining loan balance.
Typical beneficiaries include:
- Banks
- Credit unions
- Car dealerships (for auto loans)
Since the benefit goes to the lender, your loved ones won’t receive any money from this type of policy. However, it may help protect them from dealing with your unpaid debts after you're gone.
Pros of Credit Life Insurance
Helps You Leave a Larger Inheritance
When you pass away, your estate (your home, savings, and other assets) must settle any unpaid debts before your beneficiaries receive anything. If you still owe a loan amount, creditors can file claims against your estate.
Credit life insurance may help by:
- Paying off your remaining loan balance
- Leaving more of your estate intact for your loved ones
- Allowing beneficiaries to keep key assets, such as a home, instead of selling them to repay debts
For example, mortgage credit life insurance can help ensure your family keeps the house after your death by covering the rest of the mortgage.
Helps Protect Co-Signers and Spouses
If someone co-signed your loan, they’re legally obligated to repay the remaining balance if you die. Credit life insurance helps reduce that risk.
This type of policy can:
- Pay off the loan balance so your co-signer isn't burdened
- Shield your spouse from debt if you live in a community property state
- Prevent creditors from seizing jointly owned assets
Community property states include:
- Alaska
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Doesn’t Require a Medical Exam
Credit life insurance is typically guaranteed issue, meaning you don’t need to go through medical underwriting to qualify. Issuance may still depend on responses to application questions, even if no medical exam is required.
That means:
- No medical exam required
- No health questions to answer
- May be easier to qualify for than traditional life insurance
This can be helpful if you have health conditions that might otherwise limit your insurance options.
Cons of Credit Life Insurance
Doesn’t Pay Your Family
Credit life insurance only pays out to your lender - not your loved ones. If you pass away, the policy helps cover your remaining loan amount, but:
- It doesn’t provide any additional money to your family
- It won’t help with funeral costs or everyday living expenses
- The coverage ends once the loan is paid off
This means your beneficiaries won’t receive a death benefit like they would with a traditional life insurance policy.
May Cost More Than Traditional Life Insurance
Because credit life insurance doesn’t require a medical exam, the premiums may be higher - especially if you're in good health. Compared to traditional life insurance, credit life insurance may:
- Cost more for the same or less coverage
- Offer less flexibility in how the death benefit is used
- Provide decreasing coverage as your loan balance drops
If you're healthy and qualify for an individual life insurance policy, it could be a more cost-effective way to protect your family and debts. Individual costs and coverage vary. Consider comparing quotes with a licensed insurance professional.
Adds to the Cost of Your Loan
Credit life insurance is an extra expense. Depending on how the premiums are paid, it could increase the total cost of your loan. You may pay for credit life insurance by:
- Paying a lump sum up front
- Making monthly or annual premium payments
- Rolling the premium into your loan amount, which increases the total you borrow
If the premium is added to your loan, your lender may charge interest on that amount - raising your overall repayment cost over time.
Life insurance may help cover outstanding debts, which can ease the financial burden on your loved ones. Request a Free Life Insurance Quote
Who Needs Credit Life Insurance?
Credit life insurance isn’t required, but it can be useful in certain situations - especially if you're concerned about how your debt could affect others.
You might consider credit life insurance if:
- You’re taking out a loan amount that could financially burden your family if you die
- You don’t have any other life insurance to cover debts or final expenses
- You have limited assets to help repay outstanding debt
- You have a co-signer on your loan who would become legally responsible for repayment
- You live in a community property state, where your spouse would inherit your unpaid debt
- You can’t qualify for traditional life insurance due to health issues - credit life insurance usually doesn’t require a medical exam or health questions
By law, lenders cannot force you to buy it in order to get approved for a loan. Here’s what you should know:
- Lenders cannot deny your loan if you say no to credit life insurance
- They also can’t offer better loan terms in exchange for buying the insurance
- Your decision to decline coverage cannot affect your loan eligibility
While lenders may suggest this coverage to help protect their investment, you have the final say on whether to purchase it.
How Much Does Credit Life Insurance Cost?
The cost of credit life insurance depends on how much you plan to borrow and the length of your loan. Generally, the more you borrow, the more expensive the credit life insurance policy, as it could pay off a larger debt. Premiums can also depend on the type of loan you take out and where you live.
The cost of credit life insurance doesn't depend on your health. These policies are guaranteed issue. Applicants pay the same premium, regardless of health. In exchange, these policies typically charge more than regular life insurance that does use medical underwriting. Proceeds from credit life insurance may be subject to taxation. Consult a tax advisor for your specific situation.
The only way to know for certain how much credit life insurance will cost is to apply for a free quote from your lender while setting up your loan. You could then compare this cost against setting up a regular life insurance policy.
Things to Ask Yourself Before Buying Credit Life Insurance
Before buying a credit life insurance policy, ask yourself the following questions:
Could You Qualify for Your Own Life Insurance Policy?
If you're young and in reasonably good health, you likely could qualify for an individual life insurance policy that costs less than credit life insurance. However, if you have health issues and worry about qualifying for a regular life insurance policy, credit life insurance could be a better choice. These policies don't consider your health for setting the cost.
Could the Unpaid Debt Impact Others?
If you pass away without paying off your debt, would it impact others? This is a concern if someone else co-signed your loan or your spouse would take over the debt in a community property state. That said, if you're single and no one else would be responsible for paying off your debt, it might not be worth getting credit life insurance.
Do You Have Other Savings or Insurance To Help Pay off the Debt?
If you have other savings and life insurance, would you feel comfortable using that money to cover any outstanding debt after you pass away? That way, you wouldn't have to pay for credit life insurance. But if you want to maintain these savings for your beneficiaries, credit life insurance could be worthwhile. Consider how much life insurance you might need to cover all your financial goals.
Do You Want Life Insurance Protection After Paying off the Debt?
Credit life insurance ends after you pay off the debt. These policies don't provide long-lasting protection. If you want coverage beyond the length of your loan or even for the rest of your life, consider getting your own life insurance policy. If you only want life insurance to help pay off debt, credit life insurance could make more sense.
The Bottom Line
Be sure to consider all your possible options before signing up for a credit life insurance policy. A financial professional could help you compare credit life insurance against regular life insurance to find the right fit for your debt management strategy.
Credit life insurance may help reduce the financial burden of unpaid debt. Request a Free Life Insurance Quote
