Life Insurance

What is Credit Life and Disability Insurance? Do I Need It?

What is Credit Life and Disability Insurance? Do I Need It?

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Credit life insurance is primarily sold by lenders and pays off the balance of a particular debt if you pass away. Similarly, credit disability or unemployment insurance can help cover loan payments if you're unable to work for a period of time. Credit life insurance policies are significantly more expensive than most term life insurance policies for the same amount of coverage, and they don't allow beneficiaries.

That's why credit life insurance is typically a poor choice unless you have a pre-existing medical condition that would preclude you from purchasing term life insurance instead.

What is credit insurance?

Credit insurance is a term that may apply to four different policies:

  • Credit life insurance pays off a debt if you pass away.
  • Credit disability insurance covers loan payments if you become disabled and you're unable to work. May be limited to a certain number of payments or total amount paid.
  • Credit unemployment insurance covers loan payments if you are laid off from your job. May be limited to a certain number of payments or total amount paid.
  • Credit property insurance covers property used to secure a loan, such as a boat or car. Coverage is only applicable if property is damaged or destroyed during the period of the loan.

Credit life insurance and credit disability insurance are the most commonly offered forms of coverage. They also may go by different names.

For example, a credit life insurance policy might be called "credit card payment protection insurance," "mortgage protection insurance" or "auto loan protection insurance."

These might be offered as a single policy, in which only you are covered, or a joint policy that covers you and a spouse. While joint insurance is more expensive, there's a discount when two people are on the same policy.

Is credit life insurance necessary to obtain a loan?

You're never required to purchase credit life insurance from a lender in order to obtain a loan. If a lender ever tells you this or tries to include the cost of credit insurance in your loan without properly disclosing it, you should report the company to the Federal Trade Commission.

While a lender may require you to have insurance on certain items that are used to secure a loan, such as your car or home, you're free to shop elsewhere for the policy. In addition, the lender may require you to pay for private mortgage insurance if you purchase a home and your down payment is less than 20%. You can cancel PMI once you have enough home equity. Similarly, you may be required to purchase life insurance when borrowing money through the Small Business Administration.

How does credit and disability life insurance work?

Group credit life insurance policies are generally sold to lenders, such as banks and credit unions, who offer you coverage when you obtain a loan. The policy's benefit, or face value, will typically be tied to your outstanding balance, so it decreases over time as you pay off the loan.

Credit and disability life insurance premiums can be structured in one of two ways:

Payment structure
Level premiums?
Single premiumYesSingle-premium policies can be particularly costly because you don't actually pay a one-time fee. Instead, the total cost of coverage is added to your outstanding balance, meaning you pay interest on it.
Monthly premiumNoYour policy has a "premium rate," which is essentially the cost per $100 of debt. As your balance changes each month, so do your premiums.
Auto loan life and disability insurance payments, for example, usually have a single-premium payment structure. On the other hand, credit card payment protection insurance typically costs about 1% of your previous month's balance.

Because lenders usually offer credit and disability life insurance when you obtain a loan, policies are either guaranteed acceptance or have incredibly limited underwriting. There's no medical exam and the company has none of your health information, so they have to assume you're high-risk. This significantly drives up the cost of credit life insurance, compared to fully underwritten term life insurance.

Credit and disability life insurance policies also come with age limits. You may not be able to obtain coverage if you're over 65, and if you already have coverage, it may expire at this point.

Should I buy credit life insurance?

The answer depends on two factors: Will your family need to cover your debts if you die, and do you qualify for a more cost-effective, flexible form of coverage?

After your death, a family member will typically only need to cover outstanding loans if:

  • They co-signed for the loan. The family member who co-signed the loan is responsible for any outstanding balance. Credit card authorized users would not be responsible for an outstanding balance, but joint cardholders will.
  • You were married and lived in a community property state. Your spouse is responsible for the debt even if they didn't co-sign the loan. There are currently only nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
  • They want to keep the property securing the loan. If the value of your estate isn't large enough to cover the outstanding loan on your car or home, your family would need to pay off the debt in order to keep the property.

If you want life insurance to cover a loan, we recommend getting term life insurance. It's the cheapest form of coverage, you can choose a death benefit that covers multiple loans or expenses, and you can choose your beneficiary. Your beneficiary can use the payout as they see fit, whether it's for funeral expenses, college tuition or monthly bills.

Term life insurance
No medical exam life insurance
Guaranteed acceptance life insurance
Credit life insurance
Maximum death benefitOver $1 million$250,000, varies by insurer$25,000, varies by insurerLoan amount
BeneficiaryYour choiceYour choiceYour choiceLender
UnderwritingHealth questions and medical examHealth questions, no medical examNo health questions, no medical examNo health questions, no medical exam
Length of coverageFixed term, 5 to 35 yearsFixed term or lifelongLifelongLength of loan

Credit life insurance is similar to guaranteed acceptance life insurance in that all applicants of a qualifying age are accepted, and premiums are significantly higher.

Insurers can't screen for pre-existing conditions, such as heart disease or cancer, so they have to assume you're high-risk. The one upside to credit life insurance is that the death benefit is equal to the loan amount. This is in contrast to guaranteed acceptance coverage, which is typically limited to less than $25,000. So, for example, if you want coverage for a $200,000 outstanding mortgage balance and can't qualify for term life insurance or no-medical-exam life insurance, then credit life insurance would be your best (and only) option.

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