Raise your hand if you’re familiar with this saying: “You can’t go with you.”
It's a saying we’ve all heard, probably many times, and it refers to the stuff and wealth we accumulate. But technically, it could also affect debt.
Because debt doesn’t necessarily disappear when you pass away; the money you owe still fit in with your estate, which means your spouse and/or heirs might have to cope with them after you’re gone.
Credit life insurance coverage is a tool that can help with paying off a debt. Mortgage protection insurance coverage is one form it requires. Knowing that you aren't leaving your loved ones with this debt is reassuring, but is credit life insurance the best option?
Here’s what you need to know.
How credit life insurance does it work?
Credit life insurance is a type of life insurance that’s specifically designed to repay a specific debt if the policyholder dies while the policy is in force.
This type of life insurance is generally sold by finance companies and banks. If you’ve ever applied for a home loan, car loan, personal bank loan or line of credit, you may have been offered a credit life insurance coverage.
For a few of these policies, the face area value is tied to the total amount on the debt. While you pay down the loan, the face worth of the insurance policy decreases. Whenever you perish, the proceeds of the policy remove the remaining balance. Level death benefit policies are available but tend to be more costly.
Should you think about buying credit life insurance coverage?
The main benefit of credit life insurance is it will pay off your debt whenever you pass away. There are two reasons why that’s the best thing.
First, it may simplify what happens for your estate once you die. Normally, your executor is responsible for taking stock of everything you own and everyone you owe, then repaying any debts from your estate’s assets. A credit life insurance policy would keep that exact debt from as being a drain in your estate, potentially leaving more assets to pass through on to your heirs in your financial legacy.
Second, credit life insurance coverage can protect co-borrowers, joint customers and/or your spouse if you live in a community property state. Ordinarily, those individuals could be responsible for any shared debts but a credit life policy could repay a covered debt.
Another good thing is the fact that credit life insurance is usually not tied to your wellbeing. Unlike traditional life insurance coverage, there’s no health exam to qualify. This coverage is totally voluntary; you either sign up for it or else you don’t.
Next, some credit life insurance policies remove the debt in case the policyholder becomes disabled and may not work to generate money.
You can purchase credit life insurance even if you're not in good condition, so it can be a wise decision for any consumer having a medical condition that renders him/her ineligible for term life at a reasonable cost (or at all). Potentially getting coverage for your full loan balance gives credit life insurance an edge over most guaranteed issue life insurance policies, which also require no health check, but typically maximize at about $50,000 in coverage. Observe that some credit life policies cap the death benefit.
As with many things in life, you'll need to weigh the pros and cons. Here are some possible disadvantages to weigh against those benefits.
Credit life insurance cost vs. coverage
Credit life insurance coverage rates typically rely on the original loan balance, the type of credit you’re insuring and also the type of policy.
Credit life insurance coverage generally is more expensive than term life insurance
Most importantly, the price is generally much higher for credit life insurance than for term life insurance with a comparable death benefit. Should you go for credit life insurance over term life, you can end up getting far less coverage for the same premium. You might be able to get more for the money having a term life policy instead. Why? Because credit life insurance generally is a guaranteed issue life insurance policy and all applicants are approved for coverage regardless of their health. With term life insurance, you usually pay a lesser rate than guaranteed issue policies because term life insurance is medically underwritten, meaning your rates are in line with the risk you pose towards the life insurer. So the healthier you're, the low your premiums could be with term life insurance.
Typically, credit life insurance isn't a separate bill to pay for; the premiums are put into your monthly loan payment. That keeps things simple, but the downside is that the term length is often locked in and tied to the loan term. On some policies, just one lump sum payment premium for credit life insurance coverage is added to your beginning loan balance. In this case, your coverage may cost much more because you'll pay interest on your premiums for that lifetime of the borrowed funds.
With a phrase life insurance coverage, you can choose a coverage duration, typically of 10, 15, 20 or 30 years, and if the insurance policy is level premium, the premium will remain the same until the end from the coverage duration.
Credit life insurance coverage is associated with a diminishing face value
With most credit life insurance coverage, the policy’s face value steadily decreases with time while you remove the loan. Essentially, you’ll pay the same premium rate for less and less coverage as time goes by.
Credit life insurance isn't the same as decreasing term life. The latter types of policies are not tied to a particular debt and typically last in one to 3 decades, having a death benefit that decreases at predetermined intervals. During the time of purchase, a decreasing life policy might be cheaper than a level term life insurance policy with an equivalent death benefit in the start of coverage. But over time, you might find that you are paying more for the coverage than you would with a level term policy having a comparable (or even higher) death benefit, based on how old you are and health.
Credit life insurance is restricted in how benefits might be used
Another drawback: Credit life insurance coverage isn't designed to wipe out all your debts. This sort of coverage is typically associated with a single installment loan just like a mortgage or other personal loan. You'd need to check with each lender you borrow from to find out if coverage can be obtained and just how much it costs.
Next, the insurance policy proceeds commonly are not paid to your beneficiaries. Instead, the proceeds go straight to creditors. There’s no flexibility in how the policy can be used. You might not mind when your main goal is paying down your financial troubles. If your loved ones would prefer to repay another debt first, or you wish to give them financial resources and also the flexibility to make use of the funds toward the price of the choice, credit life insurance pops up short.
Why term life insurance may well be a better choice
Depending upon the amount of coverage purchased and also the quantity of obligations beneficiaries might be playing, term life may have the potential to complete the gaps that credit life insurance may leave behind.
While a term life insurance coverage can typically be used to help pay off debts, including student education loans, credit cards or other debts not covered by credit life insurance coverage, your beneficiaries could put the proceeds to work in different ways, too. For example, your partner or family members may use term life insurance proceeds to:
- Help pay for burial and final expenses
- Help cover daily life expenses
- Help pay for take care of a special needs child
- Establish a college fund for your children
- Set up a charitable trust
Term life insurance coverage is adaptable as to the your loved ones needs. Whenever you pass away, the insurance policy proceeds are paid directly to the beneficiaries. They are able to choose how to best use the money.
Unlike credit life insurance, neither the face value nor the premium amount on a term life policy with level premiums can change throughout the term. Also, you'll pick the term which makes the most sense for you, even if it does not match up with that number left on a particular loan.
Cost of credit life insurance vs. term life insurance insurance
Cost-wise, term life insurance is generally least expensive when you’re healthy and young than credit life insurance.
For example, a 30-year-old man in excellent health could get a 30-year, $500,000 Haven Term policy from MassMutual for as low as $22.48 per month. Exactly the same 30-year-old man would pay $30.83 monthly for credit life insurance on the loan having a starting balance of just $50,000, based on the State of Wisconsin Department of Financial Institutions. That's just one-tenth the policy of the term life policy within the example above, for around around the same price.
You might be able to find credit life insurance with a lower premium, but it's a good idea to carefully review and compare your options. Over time, you may find that you could have more coverage and pay less with term life, if approved.
Run the numbers on term life insurance coverage
Getting term life insurance may make sense if you are insurable, you need to provide all your family members with a financial back-up that won't reduction in value over time, and that could potentially do more for them than simply pay off debts. If you’re on the fence about term life insurance versus credit life insurance coverage, calculate how much life insurance you'll need. Then, estimate your policy rates to see just how much you might pay for your coverage. In the long run, you might find that term life insurance can be a smarter and more affordable choice, and also at a minimum, you'll have no trouble deciding which works for the situation.