Credit Insurance

Finance managers call it “credit life” and it’s essentially a decreasing term life insurance policy that can be added to a car finance contract that, in actuality, benefits the lender.

The word “decreasing” in this case means that the payout amount will cover the loan balance at any given point in the loan term. As the loan amount is reduced through payments, the coverage decreases to match the balance owed.

The word “term” means the policy covers a fixed period is non-renewable and builds no cash value (you can’t borrow against it). Unlike the auto insurance policies in some states, the cost of credit life insurance is not affected by the insured’s FICO scores while, in some states, age limitations are placed on which borrowers can and cannot take out a policy.

Purchasing credit life insurance
Borrowers must make a decision about credit life insurance before the loan documents are signed. The monthly cost is based on the initial loan balance with the cost added to the amount financed and raising the monthly car payment.

The pros and cons
While we feel that only the borrowers themselves can decide if they need credit life insurance, here are some pros and cons to consider:

Pros:
1. Peace of mind – if a borrower should die before the loan is paid off, the insurance coverage will pay the remaining balance and their estate won’t be responsible for any balance due. In fact the title to the vehicle will be transferred free and clear to the borrower’s estate.

2. Convenience – since the cost of the insurance is included in the car payment, there is no additional premium that needs to be paid.

3. Guaranteed – borrowers not insurable through regular channels can protect their families from additional debt if they were to die.

Cons:
1. Cost – credit life insurance is usually more expensive to buy than a comparable decreasing term life policy. The reason for this is that there’s a greater risk with credit life insurance because it’s a guaranteed issue product – eligibility is based solely on the policy holder’s status as a borrower. There are no medical exams or health questions involved. Borrowers are also paying the same premium for less protection each month.

2. Interest expense – because the cost of insurance is added to the loan, interest is also being charged on the cost of the policy.

3. Single borrowers - if there is no co-signer and the borrower is single, even if the borrower were to pass away their family could not be held responsible for the loan balance.