What Is Credit Life Insurance and Do You Need It?

The best life insurance companies offer all types of coverage, including policies designed to pay off debt. Here, we'll introduce you to credit life insurance and give you the facts you need to determine whether it's the right insurance for you.

What is credit life insurance?

Traditional life insurance pays out to your beneficiaries after you die, but a credit life policy pays out to a lender you've borrowed money from.

Let's say someone has a mortgage and wants to make sure their family can stay in the home after they're gone. Taking out a credit life insurance policy on the mortgage means the insurance company will pay the mortgage off in full if the policy holder dies.

One thing that makes mortgage credit life insurance so attractive is how easy it is to obtain. There are no medical exams necessary to qualify and no credit report pulled. Credit life insurance policies make the most sense for a person who may not qualify for standard insurance coverage.

Note: Credit life insurance is much more expensive than traditional life insurance (more on this later) because no medical exam is required to purchase it.

While credit life insurance can benefit your heirs, it primarily benefits the lender. Without a credit life insurance policy in place, a lender may be in a precarious position if you die. Unless someone has cosigned the loan, there's a joint account holder, or you live in one of the nine community property states in which your spouse is responsible for your debt, a lender could be out in the cold if your estate does not have enough money to repay the loan.

What credit life covers

Credit insurance is not just for a mortgage (although that's what it's typically used for). Any large loan, including a vacation property, a boat, or an RV, can be covered by a credit life insurance policy. It's possible to purchase credit life insurance for car loans and even credit card life insurance if you're concerned about beneficiaries getting stuck with those debts when you die.

Each policy is tied to a specific loan. As the balance on a covered loan decreases, so does the value of the credit life policy until they both reach zero. In other words, it's only in effect until it is no longer needed.

Is credit life insurance required to get a loan?

A lender cannot require you to take out a credit life insurance policy as a condition of loan approval. Still, some lenders are more aggressive than others in pushing borrowers to purchase a policy. That's because the credit life insurance policy you buy is owned by the lender. It's the lender's assurance it will be paid.

Credit life insurance is voluntary

If you meet loan qualifications, you are under no obligation to purchase credit life insurance. If a lender implies that purchasing a policy will increase your odds of qualifying for a loan, they are being dishonest. You either qualify for a loan or you don't. A credit life insurance policy has nothing to do with qualification.

Alternatives to credit life insurance

A credit life insurance policy is not the only option for making sure your debts are paid following your death. Here are several others.

Term life insurance

As we've mentioned, term life insurance tends to offer a far less expensive alternative to credit life insurance. The younger you are when you apply and the better health you enjoy, the lower the annual premium should be. The policy will only be in effect for the duration of the term, which could be 20 or 30 years, hence the name of this type of life insurance.

Savings

If you're someone who builds separate savings accounts, each with a specific purpose, make sure there's enough put away in a "house" account to pay the remaining mortgage if you die. If you've taken out a term life policy, make sure the death benefit is high enough to cover all outstanding debt, such as a mortgage.

Investments

Investing is all about making sure you and the people (or causes) you care about have a more prosperous future. If part of your investment strategy is to build up enough funds to pay off debt when you're gone, make sure your loved ones understand your intention.

How much does credit life cost?

Again, because there's no medical exam required, credit life insurance typically costs more than a term life insurance policy from the best life insurance companies. The following table illustrates the rough average annual rate on a policy with a $300,000 death benefit.

Should you buy credit life insurance?

We can't tell you whether credit life insurance is a good idea for you. What we can do is highlight several different scenarios. For example, if you have a serious health condition that would prevent you from qualifying for a term life policy, a credit life policy may make sense. Or, if you have far more debt than assets your heirs can use to pay off debt following your death, a credit life policy is worth considering. However, if you medically qualify for a term life policy, it will be less expensive. By the same token, if your estate is large enough to allow your heirs to retire debts, there's no reason to spend money on credit life insurance. To be sure what will work best for your situation, check out a credit life calculator and compare what you find with standard, affordable life insurance.

Ultimately, the credit life insurance decision is yours to make. Before you make a final decision, though, compare the other funds you'll leave behind, including savings and investments. If you'll have enough put away to pay off debt, the question of credit life insurance may be moot.