If you have a mortgage, personal loan or auto loan, you might have been offered credit life insurance from the lender. Not to be confused with traditional life insurance, credit life insurance promises to repay all or a portion of a debt balance in the event you pass away.
When other options are on the table, credit life insurance may not be the best pick for the problem you want to solve.
What is Credit Life Insurance?
Credit life insurance is a type of life insurance designed to pay off the remaining balance of a person’s outstanding debt if they pass away. When you apply for a personal loan, mortgage, auto loan or line of credit, lenders or banks will typically try to sell this type of life insurance.
If you purchase a policy, the lender or bank is the beneficiary and gets the payout, not your family. Credit life protects the interests of the lender.
Some of these policies are tied to the face value of the borrower’s debt balance. As you pay off your outstanding debt balance, the face value of the policy decreases. If you pass away, the policy’s proceeds pay off the remaining loan balance. Other policies may have a level death benefit, which means the death benefit will remain the same over the term length of the policy. Expect higher costs for a level death benefit.
How Credit Life Insurance Works
Generally, credit life insurance is a guaranteed issue life insurance policy, which means all applicants are approved for coverage regardless of their health conditions. Costs will depend on several factors, including the type of credit and credit balance.
You can usually buy credit life insurance in two ways:
- Based on a “single premium” purchase, where the full premium is calculated upfront and gets added to your loan amount. Since interest is charged on the loan balance, the credit life premium adds incrementally to the interest charges.
- Based on “monthly outstanding balance,” where your credit life payment varies based on your loan balance.
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What Does Credit Life Insurance Cover?
Credit life insurance covers outstanding debt if you pass away before the balance is paid off.
For example, if you purchase credit life insurance for your mortgage and pass away before it’s paid off, your credit life insurance covers the amount remaining on the mortgage at the time of your death. This keeps your loved ones from scrambling to handle the debt after your death.
You can typically purchase credit life insurance to cover:
- Mortgages
- Auto loans
- Education loans
- Lines of credit
- Credit card debt
- Financed retail purchases
Related: The Keys To Mortgage Life Insurance
Advantages of Credit Life Insurance
A key benefit of a credit life insurance policy is that it will pay off a specific revolving debt balance (like a credit card or line of credit) if you pass away. It’s a viable option for people who want to cover a relatively small loan and don’t need or want a larger term life insurance policy.
The average credit life insurance policy has coverage of around $5,600, according to Hause Actuarial Solutions. Buying credit life insurance to cover a small debt like this would be cheaper per $1,000 of coverage than buying a small term life policy of $10,000, according to Hause’s analysis.
Credit life insurance can also streamline the estate process. Typically, the executor of an estate reviews all of your assets and liabilities and then repays your debts with the available assets. If you purchase a credit life insurance policy, the executor won’t have to use your financial resources to repay that specific debt balance.
Another benefit is that a credit life insurance policy can help a co-signer, joint account holder or spouse (if you live in a community property state). If you pass away, these individuals would be financially responsible for repaying outstanding debt. A credit life insurance policy would relieve them of this financial obligation and help them maintain a good credit score.
You can additionally purchase a credit life insurance policy even if you’re not in good health. The best term life insurance rates go to those with good health, but there’s no health exam required to qualify for credit life insurance.
Disadvantages of Credit Life Insurance
While the benefits of credit life insurance may have some appeal in specific situations, there are better options depending on your overall financial picture.
If you have debts beyond a single loan, term life insurance can provide a much larger amount of insurance protection at a better price. And if you’re looking to cover more than debts, such as a child’s college years or the time until you retire, term life insurance makes more sense.
Credit life insurance also lacks flexibility for the death payout. A payout goes directly to the lender. Since your family doesn’t receive the money, they don’t have the option to use the funds for other purposes that might be more urgent.
How Much Does Credit Life Insurance Cost?
The cost of credit life insurance depends on items, such as the amount of credit or loan balance, type of credit and type of policy you purchase. The higher the credit balance you need covered, the more it costs to insure.
Credit life insurance usually costs more than standard term life insurance policies. Credit life insurance is a guaranteed issue policy, meaning it covers you regardless of your health status. This makes credit life policies a greater risk for insurance companies. Term life usually considers your health, so if your medical evaluation finds you healthy, you receive lower rates because you pose less risk.
The Wisconsin Department of Financial Institutions approximates a $50,000 credit life insurance policy costs $370 annually. Forbes Advisor’s analysis of average term life insurance rates for a $500,000, 30-year term is $336 annually (for healthy 30-year-old female). Here you’d get 10 times the coverage with term life insurance for a cheaper annual cost.
Your credit life insurance and term life insurance costs will vary from the examples due to your personal information, such as age, health and amount of life insurance policy. To discover your costs, compare life insurance quotes for both types of coverage.
Biggest Sellers of Credit Life Insurance
Sales of credit life insurance are generally done through banks and lenders. These are the top insurers for total sales.
| Rank | Company | Net written premiums |
|---|---|---|
| 1 |
CMFG Life Insurance Co.
|
$180,933,813
|
| 2 |
American Health & Life Insurance Co.
|
$82,715,564
|
| 3 |
Minnesota Life Insurance Co.
|
$66,634,012
|
| 4 |
Life of the South Insurance Co.
|
$53,452,213
|
| 5 |
Central States Health & Life Co. of Omaha
|
$35,221,624
|
| 6 |
American National Insurance Co.
|
$19,629,891
|
| 7 |
Plateau Insurance Co.
|
$14,237,763
|
| 8 |
American Federated Life Insurance Co.
|
$9,643,775
|
| 9 |
Bankers Life of Louisiana
|
$9,625,848
|
| 10 |
Cooperativa De Seguros De Vida
|
$9,215,190
|
Source: National Association of Insurance Commissioners, based on net written premiums in 2020
States With the Highest Credit Life Insurance Sales
Sales of credit life insurance are highest mainly in the South.
| Rank | State | State’s percent of credit life insurance premiums nationwide |
|---|---|---|
| 1 |
Texas
|
14%
|
| 2 |
Louisiana
|
7.14%
|
| 3 |
Florida
|
5.50%
|
| 4 |
North Carolina
|
4.84%
|
| 5 |
Michigan
|
4.61%
|
| 6 |
Tennessee
|
4.49%
|
| 7 |
Mississippi
|
4.36%
|
| 8 |
Georgia
|
4.31%
|
| 9 |
South Carolina
|
4.23%
|
| 10 |
New York
|
4.11%
|
Source: National Association of Insurance Commissioners, based on net written premiums in 2020
Can I Cancel My Credit Life Insurance?
While rules may vary by the insurance provider, you should be able to cancel a credit life insurance policy at any time. Depending on when you cancel, you might be eligible for a full or partial refund. Usually, to get a full refund, you must cancel within 10 days (though some companies or states’ guidelines allow up to 30 days).
Generally, your refund will be calculated by the Rule of 78 or a pro-rata method.
- Rule of 78: With the Rule of 78, lenders calculate interest for the entire term of the loan and then assign a share of that interest to each month. If your lender uses this method and you have a 12-month loan, they would add the numbers 1 through 12 together, which equals 78. Next, they would assign a portion of the interest to each month in reverse order. Therefore, the first month the borrower may pay 12/78th of the loan’s interest and so on.
- Pro-rata: The pro-rata method is a little easier to understand. Let’s say you cancel your credit life insurance at the beginning of the 6th month of coverage, but you have paid for the entire year. With the pro-rata method, you may get a 50% refund on the policy.
If you pay off the debt early, you may also be entitled to a refund or credit for the unused premium payments.
Some lenders may offer a “free” introductory period for 30 to 90 days. But if you want to cancel, you will be responsible for taking action. If you forget to cancel after the introductory period, you may not receive a full refund for the policy.
What to Consider Before Buying Credit Life Insurance
Credit life insurance can be more costly than term life insurance with fewer benefits. You need to consider your needs, options available and costs before buying credit life insurance.
Items to consider when deciding if credit life insurance is right for you:
- Review if you already have coverage in place, such as a term or whole life insurance policy, which would cover the debt if you passed away.
- Compare the rates and amount of credit life insurance coverage to term life insurance. See which makes sense for your needs. If you’re older or in bad health, credit life insurance may be easier and cheaper for you to obtain.
- Evaluate limits or exclusions that credit life insurance policies contain, such as whether it will only pay your minimum monthly payment on your credit card or the total card’s balance.
Other Types of Credit Insurance Policies
In addition to credit life insurance, there are other types of credit insurance policies you may want to be aware of:
- Credit disability insurance: This pays for all or a portion of your monthly loan payment in the event you become ill or injured and cannot work during the policy term. Often, there is a waiting period before your policy benefits kick in (such as a 14-day waiting period). Some credit life insurance policies may also pay off your debt in the event you are disabled and no longer able to work.
- Credit involuntary unemployment insurance: Also known as involuntary loss of income insurance, this insurance policy pays all or part of your monthly loan payments if you lose your job through no fault of your own, such as a layoff.
- Credit property insurance: This policy protects your personal property used to secure a loan if it’s destroyed by an event such as theft, accident or natural disaster. But before you buy this credit property insurance type, take a look at your homeowners insurance policy or renter’s insurance policy. If you have a comprehensive policy, buying credit property insurance might duplicate your existing coverage.
