Credit Life Insurance
Credit life insurance is a specialized life insurance policy designed to pay your debts in the event of your death. Typically linked to a specific loan, the amount of your coverage decreases as you pay down your debt until both numbers hit zero.
- Written by Lindsey Crossmier
Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.Read More
- Edited BySavannah Pittle
Senior Financial Editor
Savannah Pittle is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.Read More
- Reviewed ByEric Estevez
Owner of HLC Insurance Broker, LLC
Eric Estevez is a duly licensed independent insurance broker and a former financial institution auditor with more than a decade of professional experience. He has specialized in federal, state and local compliance for both large and small businesses.Read More
- Published: December 5, 2022
- Updated: December 20, 2022
- 5 min read time
- This page features 4 Cited Research Articles
- Edited By
- Credit life insurance ensures debts are paid after an unexpected death.
- Your policy’s coverage decreases as you pay down your debt.
- The death benefit of a credit life insurance policy goes to the lender, not your beneficiaries.
- You do not need a medical exam to qualify.
What Is 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.
How Does Credit Life Insurance Work?
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.
Pros and Cons of Credit Life Insurance
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.
- Ensures major loans like mortgages are repaid in the event of your death.
- Protects cosigners from having to assume the full debt load. Also protects spouses in states with community property laws.
- Coverage is not dependent on the condition of your health; no medical exam is necessary.
- The death benefit goes to your lenders, not to your beneficiaries.
- Your premiums stay the same, despite decreases in your coverage over time.
- Premiums can be much higher than they are for similar (or even larger) amounts of term life insurance coverage.
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.
How Much Does Credit Life Insurance Cost?
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.
Taxes on 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.
Who Needs Credit Life Insurance?
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.
Alternatives to Credit Life Insurance
Credit life insurance might not be the best choice for every situation. You might find another option that better suits your needs.
- Existing Insurance
- Your current term or permanent life insurance policy might already include debt coverage.
- Term Life Insurance
- If you don’t have insurance, a term life insurance policy might be a good choice. More flexible than credit life insurance, term life insurance will usually cost less. With a term life policy, the payout will go to your beneficiary, not to your lender, who can use the money in a way that suits their situation best.
- Savings or Investment Accounts
- A savings or investment account is a solid financial resource. If you have either, you might not need credit life insurance to cover your debts when you are gone.
Editor Samantha Connell contributed to this article.
4 Cited Research Articles
- Consumer Financial Protection Bureau. (2022, May 16). Am I Responsible for My Spouse’s Debts After They Die? Retrieved from https://www.consumerfinance.gov/ask-cfpb/am-i-responsible-for-my-spouses-debts-after-they-die-en-1467
- Federal Trade Commission. (n.d.). Cosigning a Loan FAQs. Retrieved from https://consumer.ftc.gov./articles/cosigning-loan-faqs
- Office of the Insurance Commissioner, Washington State. (n.d.). Credit Insurance – Do You Really Need It? Retrieved from https://www.insurance.wa.gov/credit-insurance-do-you-really-need-it
- State of Wisconsin Department of Financial Institutions. (n.d.). Credit Insurance. Retrieved from https://www.wdfi.org/OFL/brochures/credit/credit_insurance.htm