Credit Life Insurance

Thank you for your question about credit life insurance and car loans. We will help you understand what is credit life insurance and why lenders might require you to buy a policy for a car loan and other loans or debt.

What is credit life insurance?

Credit life insurance is a form of term life insurance. Credit life insurance can be purchased when getting a loan for a vehicle (such as a car or truck), mortgage, or unsecured debt, including credit card debt.

As the balance of the loan decreases, the amount of the credit life insurance decreases. If the borrower dies during the term, the lender is the beneficiary of the insurance contract.

Pros of credit life insurance

The major pro of credit life insurance is if the borrower dies, the loan is paid, and the estate of the deceased receives an asset free and clear. The item is therefore an asset, as opposed to an asset encumbered by a liability that may exceed the value of the asset. Additionally, the family of the deceased does not have to pay the loan back. Lastly, it provides them with financial security in case of an unexpected death.

Cons of Credit Life Insurance

The cons to credit life insurance concern its value. Life insurance tied to a loan can be a poor value. The borrower buying term insurance on the open market will almost always find greater coverage for the same cost, or the same coverage for less by comparison shopping term life policies. Life insurance is a poor value if the borrower has no dependents and does not wish to leave assets to his or her estate. Some credit life insurance policies do not pay if the borrower dies from a pre-existing condition.

Does a lender require credit life insurance?

Generally, a lender may not require a borrower to buy credit life insurance as a condition for being approved for a loan. If the finance person writing the loan insists this is the case, check with the insurance commissioner in your state before agreeing to buy credit life insurance. In most states, you may cancel credit life insurance during the term of the contract.

The requirements for credit life insurance can vary depending on the type of loan, including whether it's a car loan or another secured loan. Here are some key points to consider:

1. Type of Loan: For secured loans, such as car loans or mortgages, lenders may have different policies regarding credit life insurance. While they generally cannot require it as a condition for loan approval, they might strongly recommend it, especially if the loan amount is substantial.
2. Lender's Policy: Each lender may have its own set of policies and recommendations. Some might be more insistent on credit life insurance for certain types of loans, like car loans, where the asset (the car) depreciates quickly.
3. Risk Factors: Lenders consider the risk associated with the loan. For high-value or high-risk loans, they might suggest credit life insurance more strongly. This is because, in the event of the borrower's death, the insurance can cover the remaining debt, ensuring that the lender doesn't lose money and the borrower's estate or co-signers are not burdened with the debt.
4. State Regulations: As mentioned, it's important to check with your state's insurance commissioner. State regulations can influence whether lenders can require or suggest credit life insurance for certain types of loans.
5. Negotiation and Comparison: If a lender is pushing for credit life insurance on a car loan or any secured loan, it's wise to shop around and compare terms with other lenders.
6. Age and Health Considerations: You asked about the age of the borrower. There is no universal rule concerning age limitations on credit life insurance contracts. Some policies end when the borrower reaches the age of 70. However, this is not a hard-and-fast rule. Review the credit life insurance policy terms and conditions carefully before signing the agreement. In particular, watch for limitations on pre-existing conditions and the maximum age covered.

See the Bills.com Insurance page to learn more about auto, home, and health insurance.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com