Credit Life Insurance

Finance managers sometimes refer to it as “credit life”, and it’s essentially a decreasing term life insurance policy that can be added to a car finance contract. “Decreasing” means that the payout amount is designed to cover the loan balance at any given point in the loan term. As the loan is paid down, the insurance coverage also decreases to match the loan balance.

“Term” refers to a policy that covers a fixed period, is non-renewable and builds no cash value (you can’t borrow against it). In addition, its cost is not tied to credit underwriting scores and, in some states, age  limitations are placed on borrowers.

How to buy
If you elect to get credit life insurance you’ll need to do so at the time you sign the loan documents. The monthly cost is based on the beginning loan balance and the premium is added to the amount financed, raising the monthly car payment.

The pros and cons
Only you can decide if you need credit life insurance. Here are some points to consider:

The good:
1. Peace of mind – if you should die before the loan is paid off, the insurance coverage will pay the remaining balance and your estate won’t be responsible for any balance due

2. Convenience – since the insurance premium is included in your car payment, there is no additional bill you need to pay.

The bad:
1. Cost – typically, credit life insurance is more expensive to buy than a comparable decreasing term life policy.
2. Interest expense – because it becomes part of the loan, interest is charged on the policy cost.
3. Single borrowers - if there is no co-signer and you’re single, even if you were to die your family cannot be held responsible for any loan balance.