About Credit Life Insurance:

Credit life insurance is a type of life insurance policy designed to pay off a borrower’s outstanding debts if the policyholder dies. It’s typically used to ensure you can pay down a large loan like a mortgage or car loan.

The face value of a credit life insurance policy decreases proportionately with the outstanding loan amount as the loan is paid off over time until there is no remaining loan balance.

KEY TAKEAWAYS:

How Credit Life Insurance Works?

1. Credit life insurance is typically offered when you borrow a significant amount of money, such as for a mortgage, car loan, or large line of credit. The policy pays off the loan in the event the borrower dies.
2. Such policies are worth considering if you have a co-signer on the loan or you have dependents who rely on the underlying asset, such as your home. If you have a co-signer on your mortgage, credit life insurance would protect them from having to make loan payments after your death.
3. In most cases, heirs who aren’t co-signers on your loans aren’t obligated to pay off your loans when you die. Your debts are generally not inherited. The exceptions are the few states that recognize community property, but even then only a spouse could be liable for your debts—not your children.1
4. When banks loan money, part of the risk they accept is that the borrower might die before the loan is repaid. Credit life insurance protects the lender and, by default, also helps ensure your heirs will receive your assets.
5. The payout on a credit life insurance policy goes to the lender, not to your heirs. Although, it is against the law for lenders to require credit insurance.

Credit Life Insurance Alternatives;

If your goal is to protect your beneficiaries from being responsible for paying off your debts after you die, conventional term life insuranceMoreover, credit life insurance drops in value over the course of the policy, since it only covers the outstanding balance on the loan. In contrast, the value of a term life insurance policy stays the same. may make the most sense. With term life insurance, the benefit will be paid to your beneficiary instead of the lender.

The Bottom Line:

Credit life insurance pays off a borrower’s debts if the borrower dies. You can generally purchase it from a bank at a mortgage closing, when you take out a line of credit, or when you get a car loan, for example.

This type of insurance is especially important if your spouse or someone else is a co-signer on the loan because you can protect them from having to repay the debt. Consider consulting a financial professional to review your insurance options and to help you determine if credit insurance is right for your situation.