You probably have life insurance, but what about credit life insurance? It’s not for everyone, and the premiums are higher than regular insurance. But, if you’re carrying a lot of debt it can prevent your family from having to pay off your debts after you pass away. Some lenders will require it, but depending on where you live, the insurance might not cover the full amount of your loans.
Read on for the five things you need to know about Credit Life Insurance:
1. Credit life insurance is not life insurance
Life insurance covers the policyholder and makes payouts to their survivors upon their death.
Credit life insurance covers a large loan. It benefits its lender by paying off the remainder of the loan if the borrower dies or is permanently disabled before the loan is paid.
Here’s how it works.
A borrower takes out a mortgage and also gets a credit life insurance policy on the loan. The borrower pays a monthly premium in addition to the mortgage payment. In the event that the borrower becomes permanently disabled or passes before the mortgage is paid, the policy pays the remainder. The title of the property is transferred to the borrower’s estate and, eventually, to their beneficiaries.
2. Credit life insurance costs more than traditional life insurance
The premiums are higher because there’s a greater risk associated when compared to traditional life insurance. When the debt is paid down by the borrower, the cost of insurance decreases. However, the premium will remain constant. This often results in a loss for the policyholder.
The risk at play is on the policyholder. Anyone who borrows a large loan can be eligible without undergoing a medical examination or sharing their medical history with the insurance company.
3. The policy might not cover the entire loan
Check your state laws. Several states have set their own limits on payouts. Depending on individual circumstance, this can mean the loan won’t be fully covered.
4. Some lenders require credit life insurance
This usually occurs with mortgage loans in which the borrower is putting down less than 20 percent of the loan value. A few years down the line, when the borrower owns more equity in the home, the lender may consider a borrower’s request to cancel the policy.
5. Why credit life insurance might be for you
- Exclusions rarely happen. Coverage exclusions on standard life insurance policies can be extensive.
- Anyone can be insured. If you’re unable to get conventional coverage for any reason, this policy may be for you.
Visit our website to learn more about your insurance options from DCU.