Credit Life Insurance

If you have financed purchases, and big-ticket items, like a house or car, when you die. Instead of your chosen beneficiaries getting a death benefit from the policy, the lump sum goes directly to the lender or creditor.

How Credit Life Insurance Works - Banks, credit unions, car dealers and finance companies may offer a credit life policy when you apply for a loan or credit line — but you’re not required to buy it. If you decide to purchase coverage, premiums could work in 2 ways

• Single premium: The cost of the policy is added to your loan principal, and you pay interest on what you borrow and that premium.

• Monthly outstanding balance: Premiums are paid monthly, either in fixed installments or payments that change depending on your balance. Adjusting premiums are common for credit lines with balances that change from month to month.

If you choose to buy credit life insurance, you don’t have to be stuck with it forever. Credit life insurance can be canceled, but the process varies. If a lump sum was initially added to your total loan balance, the coverage you don’t use might be refunded. Insurance premiums paid in installments may not get refunded, but cancellation could put an end to future premiums.

What Does Credit Life Insurance Cover - Credit life insurance can cover debt for larger purchases and credit lines a policyholder doesn’t want to burden family members with when they die. Credit life insurance may cover:

• Credit lines and credit cards
• Mortgages
• Auto loans
• Retail financing (e.g., furniture and appliance installment payments)

Which Credit Life Insurance - When you die, your debt doesn't die with you. Assets in your estate may go toward paying off debt, or co-borrowers and co-signers are responsible for paying it. In community property states, spouses may be held responsible for the outstanding debt you leave behind.

If you think a spouse or co-borrower may struggle to make monthly loan payments, buying credit life insurance could make sense to eliminate the financial burden. And when that debt is gone, more of your estate can be passed down to heirs.

However, consider that other term and permanent life insurance policies may offer more coverage for your money — and at a better price — if you’re healthy. Where credit life insurance benefits go directly to the lender, traditional life insurance policy payouts go to your chosen beneficiaries, and they can use funds the best way they see fit.

The Bottom Line - When borrowing money for a large purchase, companies may pitch credit life insurance as a way to financially protect your family if you die. While it’s not required, buying it could help you avoid leaving behind outstanding debt that strains your family and depletes your estate.

However, life insurance coverage you already have may be enough for beneficiaries to handle financial obligations. If not, buying a new policy or increasing coverage could be a strategy to consider. The right life insurance depends on your situation, and comparing options can help you weigh which one makes the most financial sense.