Credit life insurance, a type of term life insurance, is specifically designed to pay off a loan if the borrower dies. It is commonly offered as an optional add-on to a loan, with the premiums included in the monthly payment.
The death benefit matches the outstanding loan balance and terminates upon loan repayment.
Credit life insurance can be valuable for borrowers who wish to safeguard their loved ones from the responsibility of debt repayment in case of an unforeseen demise.
However, it is important to recognize that credit life insurance is typically pricier than traditional term life insurance, and the death benefit is limited to the outstanding loan balance.
Here are the key features of credit life insurance:
- It is a type of term life insurance.
- Its purpose is to settle a loan upon the borrower’s death.
- It is frequently offered as an optional loan addition.
- Premiums are typically combined with the monthly loan payment.
- The death benefit usually matches the outstanding loan balance.
- The policy terminates once the loan is fully paid off.
When contemplating the purchase of credit life insurance, it is crucial to compare rates from multiple insurers and carefully review the policy terms and conditions.
Additionally, it is advisable to assess whether traditional term life insurance or another type of insurance aligns better with your requirements.
What is the difference between credit life insurance and traditional life insurance?
Credit life insurance and traditional life insurance are both types of policies that pay out a death benefit if the policyholder dies.
However, there are some key differences between them:
| Feature | Credit Life Insurance | Traditional Life Insurance |
|---|---|---|
| Purpose | To pay off a loan | To provide financial security for your loved ones |
| Term | Typically shorter | Typically longer |
| Death benefit | Limited to the outstanding balance on the loan | Can be used for any purpose |
| Premiums | Typically higher | Typically lower |
| Riders | May not offer riders | May offer riders that provide additional benefits |
Is credit life insurance a good deal?
Credit life insurance is not always a good deal. Prior to making a choice, evaluating the advantages and disadvantages is critical.
Here’s what credit life insurance offers:
- It provides assurance that your dependents won’t have to pay back your debts if you unexpectedly pass away.
- This insurance is an optional extra to a loan, making it a handy way to procure life insurance.
- For individuals who cannot secure standard life insurance due to health or other issues, it can be a suitable choice.
The drawbacks of credit life insurance include:
- It tends to cost more than the regular term life insurance.
- The death benefit of a credit life insurance policy only covers the remaining amount on the loan.
- The terms of credit life insurance policies are generally shorter than those of standard term life insurance policies.
- The transferability of credit life insurance policies is uncertain, which could be a problem if you decide to refinance your loan.
- The renewal of credit life insurance policies isn’t always guaranteed, implying the lender may not extend your policy upon its expiry.
How much does credit life insurance cost?
Bankrate reports that credit life insurance can cost from $0.50 to $0.75 per $100 of coverage monthly.
For example, A five-year loan of $10,000 with credit life insurance for the whole amount might cost you $5 to $7.50 each month.
Nevertheless, credit life insurance might be pricier than traditional life insurance with the same coverage amount.
As per NerdWallet, a 35-year-old healthy man could purchase a 20-year term life insurance policy offering a $250,000 death benefit for around $16 monthly.
This is significantly more affordable compared to paying $125 to $187.50 per month for credit life insurance covering a $250,000 loan.
