Credit life insurance is a type of insurance policy in which the beneficiary is a lender that the policyholder owes money to. This means that if you get a credit life insurance policy on your loan and you die with an outstanding balance, the death benefit can only be used to pay off the balance of the loan.

The maximum payout can’t be larger than the loan, and some states set maximums that may be smaller than your loan. As you pay down the loan, the death benefit on your credit life insurance also decreases.

What loans are eligible for credit life insurance?

Credit life insurance can be used for any large personal loan, including mortgages, auto loans or education loans. It’s against federal law for lenders to require credit life insurance, so you are free to decline a policy even if your lender requests that you take one.

Can you cancel a credit life insurance policy?

You can cancel a credit life insurance policy at any time, and you could receive a partial refund of premiums, but lenders will have different cancellation policies so be sure to read the fine print.

Pros and cons of credit life insurance

Advantages of credit life insurance

  • You may not need to submit to a medical exam to be approved for credit life insurance.

  • Because the death benefit goes directly to the lender, it keeps the responsibility for the debt out of your estate.

  • The life insurance benefit generally matches the amount of the outstanding debt.

Drawbacks of credit life insurance

  • The lender is the sole beneficiary, so your heirs can’t receive any of the death benefit or use it to pay other bills.

  • Credit life insurance is usually more expensive than term life policies of equal value.

  • The death benefit is reduced as you pay down the loan, meaning you lose value as the product matures because your premiums stay the same.

Alternatives to credit life insurance

If you want to make sure that your loved ones won’t have to worry about paying off a home, car or any other important asset you might get credit life insurance for, term life insurance or a permanent life insurance policy like whole life insurance or universal life insurance may be a better and more flexible option.

Not only can your beneficiary use the funds for whatever costs are most important, the death benefit will not diminish over the life of the policy as long as you pay your premiums —and, depending on the policy, it may even grow.

Life insurance is an important component of your overall financial plan, providing financial protection for your loved ones. A financial advisor can help you choose a policy that best meets your needs.

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