Credit Life Insurance

When you’re borrowing money to buy a car or applying for a credit card, it’s likely that you’ll be asked to purchase credit life insurance. Credit life insurance pays off the balance of your loan or line of credit upon your death. But is it a good deal?

For most people, the answer is no. Although credit life insurance pays off the your loan or line of credit balance when you die, it’s usually better to purchase term life insurance. Here’s why.

Credit life insurance is usually much more expensive than term insurance

The premium you pay for credit life insurance is usually a lot more than what you’d pay for an equivalent amount of term life insurance protection. Let’s say you’re borrowing $15,000 to buy a new car. You’re offered credit life insurance at a cost of 5 cents per $100 of your loan balance. This means that your premium for $15,000 worth of credit life insurance is only $7.50 per month.

But with that same $7.50 a month you could probably buy $50,000 worth of term insurance or possibly even more, depending on the insurer. In some states, you’ll pay less for credit life insurance than in others because each state sets its own limits on how much insurers can charge. But credit life insurance will always cost more than an equivalent amount of term protection.

Credit life insurance offers less protection to your loved ones than term insurance

When you purchase credit life insurance, your aim is probably to protect your loved ones. After all, when you die, you’ll want them to be able to pay off your debts. But remember, the named beneficiary of your credit life insurance policy is your lender. When you die, your loved ones don’t get the proceeds of your credit life insurance policy--the bank or other lending institution does.

Term insurance is a much more flexible product. It better protects your loved ones when you die because your term policy will pay out directly to the beneficiaries you have named in your policy. They can use that money for whatever they choose--including paying off your loan or line of credit balance.

What else should you know before signing up for credit life insurance?

Here are some other facts about credit life insurance that can help you make an informed decision:

Credit life insurance is optional
One fact that your lender may not emphasize is that credit life insurance is strictly optional--there’s no law requiring you to have it. And, you should be able to cancel it at any time if you decide later that you don’t want it.

Credit life insurance is profitable for lenders
One reason that lenders are anxious to sell credit life insurance is because it’s profitable for them to do so. For every policy they sell, they’ll receive a commission. Banks and other lending institutions often reward their employees for selling credit life insurance and expect them to sell it during loan closing proceedings. Lenders often add the cost of credit life insurance into your monthly payment amount before closing the loan. If you don’t really want it, ask them to refigure your loan payment before signing the paperwork.

Credit life insurance is usually packaged with credit disability insurance
When you’re offered credit life insurance, you’ll usually be offered credit disability insurance as well. Credit disability insurance makes monthly payments for you when you are disabled and unable to work.

Because credit disability insurance is usually much more costly than credit life insurance, it makes credit life insurance seem like a good deal. This may encourage you to sign up for credit life insurance, even if you can’t afford the premiums for disability insurance.

When should you buy credit life insurance?

You may want to purchase credit life insurance if you are unable to purchase any other form of life insurance, perhaps because you have a serious medical condition. The same is true of credit disability insurance. If you’ve ever suffered a disability, you may be unable to purchase an individual disability insurance policy. However, when you purchase credit life and disability insurance through your lender, you won’t have to pass a medical exam. You’re covered as long as you pay the monthly premiums, no questions asked

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