With 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Ashley Kilroy Insurance WriterWith 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Written By Ashley Kilroy Insurance WriterWith 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Ashley Kilroy Insurance WriterWith 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Insurance Writer Penny Gusner Insurance Writer and AnalystPenny Gusner is a senior insurance writer and analyst at Forbes Advisor. For more than 20 years, she has been helping consumers learn how insurance laws, data, trends, and coverages affect them. Penny enjoys translating the complexities of insurance.
Penny Gusner Insurance Writer and AnalystPenny Gusner is a senior insurance writer and analyst at Forbes Advisor. For more than 20 years, she has been helping consumers learn how insurance laws, data, trends, and coverages affect them. Penny enjoys translating the complexities of insurance.
Penny Gusner Insurance Writer and AnalystPenny Gusner is a senior insurance writer and analyst at Forbes Advisor. For more than 20 years, she has been helping consumers learn how insurance laws, data, trends, and coverages affect them. Penny enjoys translating the complexities of insurance.
Penny Gusner Insurance Writer and AnalystPenny Gusner is a senior insurance writer and analyst at Forbes Advisor. For more than 20 years, she has been helping consumers learn how insurance laws, data, trends, and coverages affect them. Penny enjoys translating the complexities of insurance.
| Insurance Writer and Analyst
Updated: Mar 11, 2024, 10:51am
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If you have a mortgage, personal loan or auto loan, you might have been offered credit life insurance from the lender. Not to be confused with traditional life insurance, credit life insurance promises to repay all or a portion of a debt balance in the event you pass away.
When other options are on the table, credit life insurance may not be the best pick for the problem you want to solve.
Credit life insurance is a type of life insurance designed to pay off the remaining balance of a person’s outstanding debt if they pass away. When you apply for a personal loan, mortgage, auto loan or line of credit, lenders or banks will typically try to sell this type of life insurance.
If you purchase a policy, the lender or bank is the beneficiary and gets the payout, not your family. Credit life protects the interests of the lender.
Some of these policies are tied to the face value of the borrower’s debt balance. As you pay off your outstanding debt balance, the face value of the policy decreases. If you pass away, the policy’s proceeds pay off the remaining loan balance. Other policies may have a level death benefit, which means the death benefit will remain the same over the term length of the policy. Expect higher costs for a level death benefit.
Generally, credit life insurance is a guaranteed issue life insurance policy, which means all applicants are approved for coverage regardless of their health conditions. Costs will depend on several factors, including the type of credit and credit balance.
You can usually buy credit life insurance in two ways:
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Credit life insurance covers outstanding debt if you pass away before the balance is paid off.
For example, if you purchase credit life insurance for your mortgage and pass away before it’s paid off, your credit life insurance covers the amount remaining on the mortgage at the time of your death. This keeps your loved ones from scrambling to handle the debt after your death.
You can typically purchase credit life insurance to cover:
A key benefit of a credit life insurance policy is that it will pay off a specific revolving debt balance (like a credit card or line of credit) if you pass away. It’s a viable option for people who want to cover a relatively small loan and don’t need or want a larger term life insurance policy.
The average credit life insurance policy has coverage of around $5,600, according to Hause Actuarial Solutions. Buying credit life insurance to cover a small debt like this would be cheaper per $1,000 of coverage than buying a small term life policy of $10,000, according to Hause’s analysis.
Credit life insurance can also streamline the estate process. Typically, the executor of an estate reviews all of your assets and liabilities and then repays your debts with the available assets. If you purchase a credit life insurance policy, the executor won’t have to use your financial resources to repay that specific debt balance.
Another benefit is that a credit life insurance policy can help a co-signer, joint account holder or spouse (if you live in a community property state). If you pass away, these individuals would be financially responsible for repaying outstanding debt. A credit life insurance policy would relieve them of this financial obligation and help them maintain a good credit score.
You can additionally purchase a credit life insurance policy even if you’re not in good health. The best term life insurance rates go to those with good health, but there’s no health exam required to qualify for credit life insurance.
While the benefits of credit life insurance may have some appeal in specific situations, there are better options depending on your overall financial picture.
If you have debts beyond a single loan, term life insurance can provide a much larger amount of insurance protection at a better price. And if you’re looking to cover more than debts, such as a child’s college years or the time until you retire, term life insurance makes more sense.
Credit life insurance also lacks flexibility for the death payout. A payout goes directly to the lender. Since your family doesn’t receive the money, they don’t have the option to use the funds for other purposes that might be more urgent.
The cost of credit life insurance depends on items, such as the amount of credit or loan balance, type of credit and type of policy you purchase. The higher the credit balance you need covered, the more it costs to insure.
Credit life insurance usually costs more than standard term life insurance policies. Credit life insurance is a guaranteed issue policy, meaning it covers you regardless of your health status. This makes credit life policies a greater risk for insurance companies. Term life usually considers your health, so if your medical evaluation finds you healthy, you receive lower rates because you pose less risk.
The Wisconsin Department of Financial Institutions approximates a $50,000 credit life insurance policy costs $370 annually. Forbes Advisor’s analysis of average term life insurance rates for a $500,000, 30-year term is $336 annually (for healthy 30-year-old female). Here you’d get 10 times the coverage with term life insurance for a cheaper annual cost.
Your credit life insurance and term life insurance costs will vary from the examples due to your personal information, such as age, health and amount of life insurance policy. To discover your costs, compare life insurance quotes for both types of coverage.
Sales of credit life insurance are generally done through banks and lenders. These are the top insurers for total sales.
