Credit Life Insurance: How to Make Sure Your Debts Die With You
Arranging for the Disposal of Your Debts Is an Important Part of Estate Planning
Estate planning can help you create a comprehensive blueprint for handling your finances during your lifetime, and beyond. An essential part of that plan centers on what will happen to any debts you may owe after you pass away. Leaving your loved ones to deal with an outstanding mortgage, credit cards, student loans or other debts can create an undue financial burden. Credit life insurance is designed to help reduce that burden, although it may not be appropriate for every estate plan.
Credit Life Insurance Defined
Credit life insurance is insurance that's intended to pay off a borrower's debts at their death. What sets these policies apart from traditional life insurance coverage is the way the death benefit is structured. With a regular life insurance policy, the death benefit is determined at the time you purchase the policy. For example, you may purchase $100,000, $500,000 or $1 million in coverage. With credit life insurance, the face value of the policy corresponds to the value of the loan it's designed to pay off. The value of the policy can decline over time as the balance of the loan declines.
Credit life insurance policies are typically associated with major loans. If you take out a mortgage to buy a home, for example, you may receive unsolicited offers for credit life policies. The same is true if you take out a large car loan. A quick internet search can turn up insurers that sell credit life policies.
Some companies may offer similar coverage for credit cards but this is less common. More frequently, credit card companies may offer policies that cover your payments for you over the short-term if you're temporarily disabled or become unemployed.
Credit Life Insurance Pros
The most obvious benefit of purchasing credit life insurance is that it takes the responsibility of paying your mortgage or other debts off the shoulders of your loved ones when you pass away.
That can be particularly important if you share a debt, like a home loan, with your spouse or someone else. Joint borrowers would ordinarily have to repay loans or other debts if a co-borrower dies but a credit life insurance policy would pay the debt for them.
Credit life insurance can also be easier to qualify for than traditional life insurance. For example, many insurance companies require you to go undergo a health screening to qualify for term or permanent life insurance. If you're in poor health, you may be facing a higher premium for coverage, or be denied altogether. While health may still be a consideration, credit life policies typically have less stringent guidelines for approval.
Credit Life Insurance Cons
One of the biggest arguments against credit life insurance is that it doesn't do anything that a traditional life insurance policy cannot. If you have a term life policy, for example, your spouse could just as easily use that to pay off your mortgage or other debts.
The fact that a credit life insurance policy loses value is another potential downside. If you take out a $250,000 mortgage and you owe $125,000 at your death, the policy would only pay enough to cancel out the loan.
If you have a $125,000 mortgage and a $250,000 life insurance policy, your spouse could use the difference to pay for burial expenses, set aside money for your children's education or simply cover day-to-day living expenses.
Cost is another consideration with credit life insurance. The amount you'll pay for coverage depends on the type of credit that's covered, the amount owed and the type policy. How you pay the premiums is also important. If you have single premium coverage, for example, the premium may be built into your mortgage automatically. This can raise the total cost of buying a home because it increases your loan amount and results in paying more in interest over time.
A policy that features monthly premiums may be more cost-friendly but the size of the policy matters. And there may be limits on how much in loan value can be covered by a credit life policy.
If you have a larger mortgage, a credit life policy may fall short. Not only can purchasing a basic term life policy be more cost-effective but it could also yield more rewards for your beneficiaries in the long-run.
Does Credit Life Insurance Belong in Your Financial Plan?
The answer to this question hinges largely on your individual financial situation. If you're in poor health and aren't able to qualify for traditional life insurance coverage, a credit life policy can shield your loved ones from having to take on your debts at some point. On the other hand, if you're healthy and can qualify for a low premium, life insurance may be the better choice.
As with any type of life insurance, it's important to evaluate the costs, coverage and whether any exclusions apply. You should also consider how premiums are paid and how long the policy covers you for. Credit life insurance can protect your beneficiaries and keep them from having to use other assets in your estates to pay debts but life insurance can achieve the same goal. Considering both sides of the coin is critical to shaping your estate plan.