Credit Life Insurance

Credit life insurance is a type of life insurance policy designed to pay off your debts in the case of your unexpected death. Policies are generally tied to specific debts, like mortgages, car or education loans, lines of credit and other types of personal loans and debt.

Unlike term and permanent life insurance policies, which directly protect your loved ones, credit life insurance policies protect your creditors. The death benefit of a credit life insurance policy goes to your lender, not your beneficiaries.

Credit life insurance policies cover the outstanding amount of your loan. Should you die, the death benefit will pay the remaining balance of the debt tied to the policy. For instance, if you are the primary breadwinner in your household, credit life insurance on your mortgage would ensure your mortgage is paid off should you die unexpectedly.

As you pay down your debt over time, your coverage decreases while your premiums do not. As with guaranteed issue life insurance, credit life policies do not require the underwriting process. That means you will qualify for coverage regardless of your health status and condition.

You can usually cancel a credit life insurance policy at any time. Within 10 days of purchase, you will likely qualify for a full refund. After that, the fees and/or refund details will vary depending on the lender’s rules and processes. Since your premiums do not change even as your coverage decreases, consider canceling the policy when your loan is close to being paid off.

Credit life insurance is not always necessary. Personal debt is not inheritable: should you die without paying off your credit card, for instance, your spouse and heirs are not required to pay that debt. On the other hand, if you are the cosigner on a mortgage, credit life insurance will pay your share should you die so your cosigner is not left with more debt than expected.

Credit life insurance is regularly offered by banks and other lenders when you take out a loan, but it is not required. Lenders may not deny you a loan if you choose not to buy credit life insurance.

The cost of life insurance policies depends on several factors including the amount of your loan, the type of debt and the state you live or apply in. While your age and health cannot prevent you from qualifying, they can influence the cost of your premiums. Lenders might bundle the premiums in with your loan, which means you would accumulate interest as well as premiums.

Because approval is not contingent on good health, credit life insurance can be more costly than the same amount of term life insurance. For instance, for $50,000 in coverage, an average healthy 40-year-old would pay $92 for term life but $370 for credit life insurance.

Because the death benefit of a credit life insurance policy goes directly to your creditor, there are no tax implications for your beneficiaries or estate.

If you are married and live in a state with community property laws, credit life insurance might be a good choice to protect your spouse from having to pay your outstanding debts. The same is true if you are the cosigner on a loan.

As a new home or car owner, you might benefit from credit life insurance — especially if you only want a simple policy to cover a debt. Be sure to check with your state insurance department: some states set limits on how much coverage a credit life insurance policy can cover.

Credit life insurance might also be right for you if you do not medically qualify for other types of life insurance.

Credit life insurance might not be the best choice for every situation. You might find another option that better suits your needs.

Editor Samantha Connell contributed to this article.