Credit life insurance is a financial plan offered to consumers which is designed to pay off the balance of a loan in the event of death or permanent disability. Simply stated, a credit life insurance is an insurance policy subscribed to by the borrower for the benefit of the lender. This means that in case of death or permanent disability, the insurer will pay any lender the balance of a mortgaged house or vehicle.
Generally in a credit life insurance, the borrower pays a premium, which is often part of his monthly amortization, that allows the lender to paid in full in the event that the borrower dies before the loan obligation is paid. After payment is made to the lender, the title of the property shall be cleared to be transferred to the estate of the deceased borrower and finally to the latter’s heirs and beneficiaries. This type of insurance is usually offered with auto loans and home loans by the lender at the time of purchase.
As compared to the usual life insurance, credit life insurance is a little bit more costly. This insurance will cover the loan or the lender rather than the borrower himself. Being so, the requirement of having to submit oneself to a physical exam is dispensed with. The insurance company also dispenses the risk of knowing whether or not the borrower is under a serious medical condition, is of poor health or is living a risky lifestyle.
The cost of a credit life insurance decreases as the debt is gradually paid by the borrower. But, the premium of the insurance remains the same. This entails that the borrower will get lesser for the money that he pays to the insurance company. It is also a downside of this kind of insurance policy that the insurance may not cover the entire loan based on the state laws applicable in the borrower’s area. Several states have imposed a limit on credit life insurance such as in New York where the credit life insurance limit is set at $220,000 on mortgages and $55,000 for other loans.
Generally, it is not advisable to get a credit life insurance if the applicant is already covered by enough life insurance to pay for his loans. Thus, it is advised to take into consideration the length of time and amount of the loan before applying for a credit life insurance since the borrower may pay off his entire loan before he dies.