When you're taking out a new loan for a home or car, or signing up for a new credit card, your lender may quickly ask you about credit life insurance. It sounds like a good idea, so your loved ones won't be stuck with your payments if you die. Before purchasing this coverage on impulse, take some time to determine if it's a good value for you and your situation.
Credit life insurance may be worth the cost in the event that you are unable to qualify for other insurance packages.
Are You Uninsurable?
Credit life insurance is probably the only option if you're in poor health and are unable to obtain a traditional life insurance policy. Since traditional insurers ask health-related questions and will require a physical exam if the face value of the policy is high enough, you'll be denied a policy if you don't meet the underwriter's requirements.
Credit life policies don't have these requirements, and receiving coverage is usually guaranteed. In this case, the higher premium costs for credit life insurance are justifiable.
Exploring the Single Premium
One of the most expensive forms of credit life insurance is a single premium policy offered with a home mortgage. These policies are typically offered on home equity loans or subprime mortgages at the time of the loan closing and are often bundled with credit disability and unemployment insurance.
The premium is a one-time fee with the premium financed in with the loan. You pay interest on this premium over the term of the loan. On a 30-year mortgage, the interest that you pay on the premium may total several times the amount of the original premium, making the coverage extremely expensive. Many lenders have agreed to stop selling this type of insurance for this reason.
Price Compared to Term
Compared to a traditional term life policy, credit life insurance is much more expensive. According to Wisconsin's Department of Financial Institutions, a healthy 40-year-old man with a $50,000 loan will pay as much as $370 per year for credit life insurance on that loan, but will pay as little as $92 per year for a $50,000 term life insurance policy.
In addition, the insurance company pays the proceeds of the credit life policy directly to the lender, but the term policy is paid directly to your named beneficiary, who will then determine the best use for the money.
Understanding Decreasing Benefits
Credit life insurance pays off the outstanding debt if you die, meaning that the benefits you pay for decrease as you pay down the loan. If you die before you make the first payment on a $20,000 loan, the policy pays $20,000 to the lender. If you die just before you were scheduled to make the final payment on the same loan, your loan balance may only be $300, which is exactly what the insurer would pay. You pay the same premium throughout the life of the loan for a decreasing benefit.
Do You Need It?
If you have term life insurance in place at a level to protect your income if you die, you probably don't need additional credit life insurance on most loans -- you're sufficiently protected by your existing term policy. On some business loans and some home mortgages, your lender may require specific life insurance.
The lender may require you to assign an existing policy to it to ensure that the loan is paid off if you die. If you don't wish to take this step, purchasing credit life insurance on that loan will eliminate that requirement.
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