Understanding Credit Life Insurance
There's a relatively new product out there called credit life insurance and it's easily confused with traditional life insurance. Credit life insurance is designed to pay off the balance of a loan in the event of your death. Kevin Lynch, assistant professor of insurance at The American College in Bryn Mawr, PA warns that this is not life insurance and there are important aspects of credit life insurance consumers should be aware of.
The article "5 Things to Know on Credit Life Insurance" by Michael Estrin on Bankrate.com highlights the five top things every consumer should know about credit life insurance since it can be very confusing. Credit insurance is commonly offered with very large loans such as car loans and mortgages and premiums are rolled into the monthly payment. Credit life insurance is typically more expensive than regular life insurance policies because there is more risk involved. There are no medical exams since eligibility is based on the loan qualifications.
Some experts believe this type of insurance isn't necessary. You are basically paying for insurance that decreases as you pay the loan down. This could be an option for people who are unable to get life insurance due to pre-existing conditions or age. Some lenders will require the borrower to take out credit insurance with the loan. This is most often seen in higher risk mortgages where the borrower does not put down 20%. There are ways to get the insurance cancelled once the loan is paid down at least 20%, but you'd have to check with the institution to see what their policy is.
There are generally no exclusions with credit life insurance since the policy is focused only on one asset. Typical life insurance policies can be filled with exclusions and they vary from state to state. Another thing to note is that the borrower doesn't need to worry about taxes with credit life insurance since the benefit goes directly to pay off the debt. These are just a few highlights about credit life insurance that should be considered. Talk to a financial expert about your particular situation to see what type of insurance would be right for you. Getting term life insurance quotes to compare against credit insurance is a good start.