Credit life insurance

Credit life insurance is a concept you need to understand. Here’s what it means.

What is credit life insurance?

Credit life insurance is a credit insurance policy that pays off a borrower’s loan if the borrower dies before repaying the debt in full. Usually, the lender rolls the cost of the credit life insurance into a loan so that it is included in the borrower’s regular monthly loan payment.

Deeper definition

Credit life insurance protects lenders as well as the estate of a borrower. Depending on the type of credit, if a debtor dies and her estate holds no allowable assets to pay off the debt, the estate may or may not be on the hook for the debt. Mortgages and auto loans are two common products that typically include credit life insurance. Some lenders require that the borrower add a credit life insurance policy when taking on a loan.

For most consumers, regular life insurance is a better option than credit life insurance. With credit life insurance, the face value of the policy decreases each month. Each monthly payment reduces the amount of the debt and the amount the policy has to potentially pay out. In addition, credit life insurance does not require a health exam, making it potentially more expensive than comparable life insurance policies.

If an estate owns assets that are exposed to seizure by lenders to pay off debt, credit life insurance is one way to shelter those assets. Another situation when credit life insurance makes sense for a borrower is in the case of loans taken out with a co-signer. The policy protects the co-signer in the event of the death of the primary debtor.

Credit life insurance example

James applied for a loan in order to buy a new Porsche 550, with his stepmother as a co-signer. Sadly, James was involved in a fatal accident on a cross-country drive in his new car, but because he was required to take out a credit life insurance policy, his stepmom was not stuck making payments on a wrecked vehicle.

Are you properly insured? Make sure you have the coverage you need with Bankrate’s life insurance calculator.

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