Consumers often confuse credit life insurance with conventional life insurance. The two are entirely different. While a standard life insurance pays out a certain amount of money in the event of the insurer’s death, a credit life insurance only pays his debt.
In this article, I’ll demystify credit life insurance. If you are not familiar with how it works, read on.
Benefit of lenders
Credit life insurance is for the benefit of lenders. If the borrower is unable to pay off the debt, the lender could take him to court, and have him pay. But in the case of the borrower’s untimely death, the lender has nobody to accuse.
He can still go the court, and make an appeal to freeze the borrower’s assets to arrange the money that the borrower owed him. But if the borrower dies penniless, then the lender doesn’t have that option either. Credit life insurance is the only thing that guarantees the money he lent will come back to him.
If a borrower with credit life insurance dies without paying the debt, the policy pays it off. Once the debt is paid in full, the ownership of the borrower assets is transferred to his legatees. Some insurance companies misguide consumers claiming standard life insurance is the same thing as credit life insurance. Consumers are advised to avoid such agencies because what they claim is far from the truth.
They are expensive
That’s right! A credit life insurance policy costs more than a regular life insurance. There’s a reason for the higher expense. If a policyholder dies after paying three or four premiums, the insurance company would still have to pay off the entire debt that he owes the lender.
The eligibility criteria are too flexible. You just need to have a debt, that all. Unlike a life insurance policy, you won’t have to submit a medical report, and reveal your health condition. That’s because you are not being insured, the loan that you have is insured.
Should you buy it?
Since expensive, a lot of people choose not to buy credit life insurance policies. People who have debt, and in a poor health condition, are not sure how long they’d live, and whether they’d be able to pay off the entire loan. They may decide on a credit life insurance. In my opinion, you, as a consumer, should consider the following factors before buying it:
Term life insurance
Do you have a term life insurance already? If you do, then how long have you been paying the premiums? If for a long time, and if the policy is nearing to the maturation date, then you don’t need a credit life insurance.
A mortgage loan is an installment loan. Mortgage insurance is for paying it off. If a person with an installment loan dies all of a sudden, his family members would find it difficult to pay down the loan because the loan amount is gigantic.
Revolving loans, such as the credit card outstanding balance is easy to pay because the amount is not that huge. Having a mortgage insurance implies that you have a mechanism to deal with installment loans, which are difficult to be paid off. Hence, you don’t need a credit life insurance.
The lender requires it
Everyone think of his own benefit. A lender knows if a borrower dies without paying the debt, it’d be hard for him to extract the money. Seeing the demised borrower’s heirs are down and out, the judge may become considerate and refuse to croak the borrower’s assets.
To rule out this possibility, many lenders insist borrowers to insure their loans by having a credit life insurance policy. In case of mortgage loans, if the down payment is only 20% of the total cost of the home, the borrower may have to insure his debt. However, if the equity position of the borrower increases to more than 20%, he could proceed for the cancellation of the policy.
Unlike a regular life insurance policy, a credit life insurance doesn’t come with a coverage exclusion. That’s because the policyholder is not insured, his debts are. The only aberration to this rule is a suicide.
I laid down all aspects of a credit life insurance. Now it’s up to you to decide whether you’d go for it or not. Even though there are some benefits, the cost is huge. Besides, if you already have an insurance, then you may not need it. Take ample time and decide what you’d do.