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Credit Life Insurance Explained

Last modified: Jul 25, 2023

Those who have ever applied for a personal loan, auto loan, or mortgage may have been offered credit life insurance at some point. However, this option is not to be confused with traditional life insurance. One of the reasons why many people opt for credit life insurance is because it can be used to repay either the total amount or the portion of the debt balance if you happen to kick the bucket.

While this is an attractive insurance option, it might not be the best choice for your circumstances. Therefore, it is advised to always consider various factors before purchasing credit life insurance.

What Is Credit Life Insurance?

It’s a kind of insurance coverage designed to pay off the remaining balance of any outstanding debt of an individual if they pass away. The policyholder will be required to pay a premium, which is often included with the monthly loan payment. However, it is not a one-size-fits-all option, even though many banks and lenders offer it.

Now, which of the following is correct regarding credit life insurance?

Once this policy is purchased, the bank or lender is going to be the beneficiary.

Yes, it’s true. In other words, it is the bank or lender that is going to get the payout and not the family of the deceased person.

Credit life insurance protects the borrower’s interests.

Incorrect. Since the bank/lender is the beneficiary of the policy, the insurance only protects the interests of the bank/lender.

What Does Credit Life Insurance Cover?

Credit life insurance offers coverage for debt repayments in the event of a disability, unemployment, or death of the policyholder. Of course, the exact benefits mainly depend on the specific circumstances of the individual and the policy type

It is important to note that credit life insurance is completely different from permanent life insurance and credit involuntary unemployment insurance (IUI). The latter makes payments on your credit obligations when you lose your full-time job through no fault of your own. Some examples of involuntary unemployment include layoffs, involuntary termination of employment, strike, and unionized labor dispute.

Another quiz question for you: Credit life insurance is typically issued with which of the following types of coverage?

  1. Annual Renewable Term
  2. Whole Life
  3. Group Term
  4. Decreasing Term

Credit life insurance is normally issued at a decreasing term (✅D). The face amount of the coverage declines as a loan amount gets reduced by the borrower’s payments.

Credit Life Insurance Benefits

No Exam Insurance

One of the benefits of credit life insurance is that it requires no medical exam at all. It covers the loan, not the individual, so you shouldn’t worry about the state of your health. 

Anyone Can Be Insured

Another major advantage of credit life insurance is that it does not consider factors such as the lifestyle or the general health of the individual. In other words, if you don’t qualify for conventional coverage for some reason, credit life insurance can be the ideal option to ensure that all of your outstanding loans are paid off in case something happens to you.

Why Should You Consider Credit Life Insurance?

Credit life insurance is an option to consider whenever you take out a large loan to purchase a home or a car.

It Prevents Your Loved Ones from Financial Hardship

One of the reasons why credit life insurance is a good choice for many folks is that it safeguards your loved ones from any financial obligations if you pass away.

Decreasing Face Value

Furthermore, a credit life insurance policy's face value decreases in proportion with the outstanding loan amount as the policyholder pays the loan over a certain period of time. This continues until both values reach zero.

It Gives You Peace of Mind

Credit life insurance can be a great option if, for whatever reason, you are not able to obtain a standard life insurance policy and are worried about what will happen to your heirs in case you pass away.

What Types of Credit Life Insurance Are There?

There are a few different types of credit life insurance designed to protect your assets against other types of risks besides early death. They are: 

  • Credit life disability insurance — offers coverage for loan payments in the event the individual becomes disabled and is unable to work.
  • Credit involuntary unemployment life insurance — makes payments on your credit obligations if you’ve lost your job through no fault of your own.
  • Credit property insurance — provides coverage for property used to secure the loan, such as a boat or a car.

How Much Does Credit Insurance Cost?

Typically, credit life insurance rates depend on the loan amount. Moreover, such factors as the type of credit and the type of policy affect the credit life insurance quote.

However, due to a greater risk associated with the product, credit life insurance will cost more than a traditional life insurance policy. The risk comes into play because credit life insurance is a guaranteed issue product.

Furthermore, you can always use a credit life insurance calculator to calculate the approximate amount of coverage you need. 

What Should I Consider Before Buying a Policy?

There are several factors to consider before purchasing a credit life insurance policy:

  • How much is the annual premium?
  • Will credit life insurance cover the full length of my loan and the total loan amount?
  • What are the limits? What are the exclusions? (What's covered and what's not).
  • Is there any waiting period before my coverage becomes effective?
  • Can I pay the premium monthly instead of financing the entire premium as part of my loan?
  • Does the premium get financed as part of the loan?

Also, while there is no universal rule regarding age limitations on credit life insurance policies, in some circumstances, the policy ends when the borrower reaches the age of 70.

Credit Life Insurance and Taxes

Since the insurance policy premiums go directly toward paying off the debt, and the insurer is the policy’s beneficiary, there wouldn’t be any implications to the estate or inheritance tax. In other words, as far as taxes are concerned, there is little for the consumer to worry about with credit life insurance.

Alternatives to Credit Life Insurance

The following are some alternatives to credit life insurance. However, all of these options come with their pros and cons that have to be weighed before the purchase. 

Can You Cancel Credit Life Insurance?

The easy-to-understand and straightforward cancelation policy is another reason why credit life insurance is considered a great option in many circumstances. 

So, for those wondering if they can cancel credit life insurance, the short answer is yes. Individuals are allowed to cancel it at any time and may also be eligible for a full or partial refund. But, it will mainly depend on the rules and regulations of the insurance provider.

Is Credit Life Insurance a Good Idea?

Among many benefits of a credit life insurance policy, the major one is that it helps safeguard co-signers of a large loan from having to pay the remaining amount to the lender in instances when the policyholder dies. In addition, age or health concerns are not considered when it comes to eligibility for a credit life insurance policy.

So, in case you’ve been worried about that or for some reason you don’t qualify for a standard life insurance policy, credit life insurance could be a possible solution for you.


Do you owe taxes when your credit life insurance pays off your debt?

Typically, an individual will not owe taxes when their credit life insurance policy goes into effect to cover their loan.

What does credit life insurance cover?

Credit life insurance provides debt protection in case the borrower dies. It is commonly offered with home and auto loans.

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