What Is Credit Term Life Insurance?
Credit term life insurance is a type of decreasing term insurance. As with any life insurance policy, a beneficiary receives the face value of the insurance if the insured person dies. With credit term life insurance, the sole beneficiary is the lender. As you make regular payments on the loan, the balance you owe on the loan decreases. As that balance gets smaller, the face amount of a credit life insurance policy gets smaller, too.
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How Credit Term Life Insurance Works
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Credit term life insurance pays off the remaining balance of a loan in the event that you die before your loan is repaid in full. The insurance protects your surviving family members from losing the property you have borrowed against if you die. It also protects the lender from losing the money you borrowed, since the lender is paid in full.
Credit Term Life and Regular Term Life Comparison
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In the case of regular term life insurance, you would name a beneficiary to receive the proceeds and that person could use the funds as desired. Paying off a home mortgage or car loan would be an option. With credit term life, proceeds of the insurance go to the lender to pay off the loan.
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When and How Credit Life Insurance is Sold
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Often when you make a major purchase such as a car, the lender will suggest adding in the cost of credit term life insurance into the car loan. You pay the premium and interest on the premium when it is lumped within the loan amount.
Ways to Trim Insurance Costs
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Before purchasing credit term life insurance, compare its cost and amount of coverage to regular term life insurance.
The cost of regular term life insurance is affected by the insurance purchaser's age. If you are young, you may be able to purchase regular term life insurance at a cost that is less than the cost of credit term life insurance. If you are making a major purchase through a loan and the lender insists that you provide insurance protection to cover the loan, consider buying a term life policy and naming the lender as the beneficiary. You may be able to satisfy the lender and pay less for the insurance.
If you are an older borrower, the cost of regular life insurance may be higher than it would be for a younger person. However, you may already have enough life insurance to cover the balance of the loan. You may not need to purchase credit term life insurance to satisfy the lender provided you assign the amount of the required benefits to the lender.
Consumer Tips About Credit Life Insurance
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A lender may require that you prove ability to pay off the loan in the event of your death. If the lender requires you to protect the loan through insurance or collateral, the requirement must be in writing. A lender cannot make your purchase of credit term life insurance from the lender as a condition of your obtaining credit.
An insurance policy is a contract. It should clearly spell out how the coverage works, when it begins and any exclusions. If you purchase credit term life, keep the policy in a safe place and make sure your family members can locate the policy.
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