5 things to know on credit life insurance

Simply put, credit life insurance is an insurance policy taken out by the borrower for the benefit of the lender. In a typical policy, the borrower will pay a premium -- often rolled into their monthly loan payment -- that allows the lender to be paid in full in the event the borrower dies before the loan is paid off. Title to the underlying asset is then transferred free and clear to the borrower's estate and ultimately, to the beneficiaries of that estate. According to Lynch, it's commonly offered with auto loans and home loans by the lender at the time of purchase.

Adding to the confusion, "credit life" is also a marketing slogan used with standard life insurance policies, with which agents suggest that regular life insurance is a way to pay off the mortgage. According to Tim Gaspar, CEO of Gaspar Insurance in Encino, Calif., that slogan, which has no bearing on the nature of the policy, usually means the consumer will end up paying more. "If they're in the market for life insurance and they hear that term, they should look elsewhere," Gaspar says.