Credit Life Insurance

Credit life insurance pays off any debt you leave behind when you pass away, so your heirs don’t have to. Here’s a look at whether this type of life insurance is necessary.

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Many people try to pay off their debts before they pass away because they don’t want loved ones to carry the burden of the debt, especially dealing with the funeral, the estate, probate and the loss of a loved one. Credit life insurance is a type of life insurance that pays off your outstanding debts after you die. The benefit is that the loved ones you leave behind don’t have to worry about paying your debts. Purchasing this type of insurance coverage may give you peace of mind that you’re not leaving an extra burden on your relatives. However, the insurance may not be worth the cost.

Who Pays Your Debt When You’re Gone?

When you die, your loved ones aren’t legally responsible for paying your debts unless they’re also named on the debt. For example, if your spouse is a co-borrower on the mortgage for you home, he or she would be responsible for keeping up with the payments if you pass away with an outstanding balance. Even if your spouse isn’t listed on the debt, they could lose the house if you pass away and leave an outstanding balance. But, if you have mortgage credit life insurance to cover your home, that policy would cover the mortgage balance. On the other hand, if you have credit card debt that’s in your name only, your relatives wouldn’t be responsible for the debt and wouldn’t face any type of loss in the event of your debt.

How Credit Life Insurance Works

The lender is the beneficiary on the credit life insurance policy. The death benefit goes directly to the financial institution that financed your loan, not to any of your dependents or other loved ones. So, the credit life insurance won’t directly benefit the family you’ve left behind. But, the insurance can save your loved ones the responsibility of using your other assets to repay your outstanding debts. Also, your loved ones don’t face any tax implications since the insurance benefit goes directly to the lender.

Credit life insurance is a guaranteed issue insurance, meaning you don’t have to take a medical exam or give complete medical details to obtain the insurance. Because of that, the insurance premiums may be higher than what they’d be with a regular term life insurance policy. The specific rates depend on the amount of the loan that’s being insured. With the exception of suicide, credit life insurance generally doesn’t have any exclusions. The death benefit is paid as long as the policy is in good standing.

Credit Life Insurance May Be Required

Many lenders, like those who lend money for homes and cars, will add credit life insurance to the cost of your loan at the time you borrow the money. Some dishonest salespeople or loan brokers may even add the insurance without telling you. That practice is illegal in many states, so contact your state insurance office if a lender tells you that credit life insurance is required or if you later notice that a credit life premium has been added to your loan.

Credit Disability Coverage

Credit life insurance policy may also come with credit disability insurance which would make your monthly payments if you become disabled and you’re not able to work. This insurance would only cover debt payments, not any other medical expenses related to the injury. Credit disability insurance may not be necessary if you have another disability or supplemental insurance.

Is it Worth It?

You may not need a credit life insurance policy. Your term or whole life policy, if the death benefit is large enough, can be used to cover your outstanding debts. However, if you have a medical condition that keeps you from getting traditional life insurance, credit insurance is a good option. While your family wouldn’t benefit from the insurance, they would have to worry about your outstanding loans. But if you don’t have any survivors, you may not need the insurance after all.

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