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What Is Credit Life Insurance, and Do You Really Need It?

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What Is Credit Life Insurance, and Do You Really Need It?

Credit life insurance may pay off your loan should you pass away. However, coverage isn’t always required.

By Georgia Rose Lead Writer | Technology, science, insurance Georgia Rose is a lead writer for NerdWallet and manages the content for life insurance. Through her professional career, Georgia has written on many different subjects, including personal finance, government policy as well as science and technology. She is a fan of researching complex subjects and distilling the data for her readers.

Jun 29, 2020

Edited by Lisa Green Assigning Editor | Insurance, data journalism Lisa Green was an insurance writer at NerdWallet before being elevated to editor. Before that, she worked for twenty years in the role of editor for The Tennessean in Nashville, where she was part of a 2011. Pulitzer Prize finalist team. Her work has won awards at the Society of American Business Editors and Writers, Investigatory Reporters and Editors and The Society of Professional Journalists.

A majority of the items featured on this page are provided by our partners, who pay us. This influences which products we review and where and how the product is featured on the page. However, this does not influence our evaluations. Our views are our own. Here is a list of and .

There’s a certain degree of risk when you take out a loan, especially when you’re borrowing lots of money. The idea of preventing others from taking on your debts if you die can be a natural worry. However, debts are rarely passed down through the generations, so your loved ones probably won’t be responsible for your loan.

In some situations, though, your debt can have a negative impact on the people that you pass on. Credit life insurance can help reduce these risks by paying back the lender in the event of your death prior to paying off the loan. But , this kind of insurance isn’t always necessary and can be very expensive. Before purchasing a policy, take into consideration the cost and look into other options like term life insurance, which usually provides the same security for a lower cost.

What is credit life insurance?

Credit life insurance covers your loan if you die before making payment on the debt. The policy’s face value is linked with the loan amount. As you pay down the debt, the coverage amount decreases. If you die before having paid off the loan the insurance company will pay the balance of the loan.

Life insurance for credit doesn’t safeguard you in the same way as it protects the lender. The premiums remain the same for the duration of the policy regardless of how small the loan grows. The lenders are usually the beneficiary of credit , meaning that the cash payout is made directly to them, not to your heirsshould you pass away.

Different types of credit insurance

Credit life insurance is a specific type of that pays out if you die. Other types of credit insurance are able to repay loans in less severe circumstances, such as voluntary unemployment disability, disability, theft, loss of property, or leave of absence.

What does credit life insurance protect?

Credit life insurance can be used to cover auto loans as well as education loans, bank credit loans and various other loans. In general, the amount of insurance can’t exceed the amount you are owed to the loan.

The state you live in may establish the maximum coverage limits on credit life insurance policy. For example, credits life insurance plans for home mortgages within New York typically can’t exceed $220,000. Therefore, if your mortgage is valued at $440,000, the Credit life insurance plan could only provide half the loan.

In generally the case, credit life insurance is provided by lenders or banks when you take out a loan. However, you’re generally not required to purchase coverage if you don’t want it. Indeed, loan providers cannot refuse a loan application because of the borrower’s inability to buy credit insurance, according to the Federal Trade Commission. It’s also illegal for lenders to offer credit insurance without your knowledge or consent.

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Alternatives to credit life insurance

If you’re looking for loan insurance, credit life isn’t your only choice. Consider the following alternatives before purchasing an insurance policy.

Credit life insurance is different from. term life insurance

Standard can help you pay off your loans if you die, and it’s typically cheaper in comparison to credit life insurance, and is more flexible. The death benefit remains the same for the duration of the policy and is paid to the beneficiary regardless of loan amount.

Also, you can for your term insurance. This means your heirs -not the lender- receive the money, no matter how much you’ve paid off the loan you’ve paid off and they are able to use the funds for any purpose.

Find the best life insurance policy for you

Make sure you and your loved ones are protected – review the most customized life insurance quotes offered by our partners.

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Existing life insurance policies

Instead of buying more coverage it is possible to use an already existing permanent or term insurance policy to pay for the cost of a loan. Keep in mind that lenders may want to verify coverage prior to making a decision. Also, make sure you’re able to allocate some of the funds from your existing policy to pay for the loan, especially in the event that you purchased the policy in order to cover specific expenses.

Traditional savings account

Existing savings or investment accounts are a good financial safety net. If the money in your savings account can be used to pay off any outstanding debts that you have after your death, you may not need insurance.

Are credit life insurance policies right for you?

You probably don’t need credit life insurance if the only concern is debt inheritance. It’s because the debt you owe rarely passes to your heirs when you die. Instead, your estate settles your debts using your assets. If there’s not enough money to cover what you owe the debt, it is usually unpaidand your family members aren’t obliged to settle it.

There are occasions when an outstanding loan could have a negative impact on an estate’s planning. Life insurance can be an effective tool for the following situations:

Your estate shouldn’t be used to be used to pay off your dues. If you pass away or pass away, the item you borrowed money for –for example, the house or car- may be sold to repay the lender. This may reduce the amount left to your descendants. The loan insurance will cover any unpaid payment if you pass away, keeping the debt out of your estate.

You should protect co-signers. When you you’re equally in charge of the debt. Credit life insurance pays any outstanding debt in the event that you die, thus removing the responsibility from the surviving co-signers.

You live in a community property state and would like to safeguard your spouse. In states with community property laws your assets — and your debts — typically pass onto your partner. A credit life insurance policy will pay off the loan so your spouse doesn’t have to. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are states that have law governing community property.

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What is the cost of the credit Life insurance price?

Premiums for credit life insurance differ across states and are dependent on the size and nature of the loan. The cost can be greater than other life insurance policies because of two key factors:

The coverage is usually guaranteed no matter what your medical condition is. As with most policies, insurers typically charge higher rates when they don’t know your medical history, as the risk to insure you rises. Some credit life insurance policies are guarantee-based. Your age, health and job status could affect your eligibility.

Lenders sometimes roll insurers’ premiums in with the loan payment. This might sound like a good idea, but it could end up costing you more. You’re borrowing money to pay for your insurance premiums. This will raise the amount you pay for interest.

Below are some sample annual rates for $50,000 policy for credit and term life policies, for a person who is healthy, based on data from the .


Credit life

Term life













Can you cancel credit life insurance?

You could be able to end your coverage and get a refund of your premiums in the event that you need to end your loan life insurance contract early. The cancellation policy may differ among lenders. The ability to cancel your policy can be beneficial if you are paying the majority of your loan and don’t wish to pay the high price for less protection.

Before you buy an insurance policy, make sure you know if you can cancel your coverage before the deadline and what kind of refund policy are offered.

About the author: Georgia Rose is a the lead writer at NerdWallet and is responsible for our content on shopping for life insurance. Her work has been highlighted in The New York Times, The Washington Post, The Independent and ABC News.

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