You almost certainly already have health, life, auto, and homeowner’s insurance policies. You might even have pet insurance for your four-legged companions. Thus, the question arises: Do you, too, require credit life insurance?
Let us dispel some of the misunderstandings and misinformation surrounding this little-known coverage policy. Continue reading to learn everything you need to know.
Credit Life Insurance
To begin, credit life insurance is not the same thing as life insurance. However, credit life insurance and traditional life insurance are two distinct types of coverage. Simply put, credit life insurance is an insurance policy that the borrower purchases for the lender’s benefit. It can be perplexing and intend to last a lifetime. Despite the fact that they are two very different products, they frequently achieve very similar results.” Of course, the similarity of the names does not help.
To add to the confusion, “credit life” is also a marketing slogan for standard life insurance policies. According to Tim Gaspar, CEO of Gaspar Insurance in Encino, Calif., that slogan, which has nothing to do with the nature of the policy, almost always results in the consumer paying more.
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Meanwhile, credit life insurance protection can help ensure that your credit repayments are covered. Especially, in the event that unforeseen events impair your ability to earn an income, such as disability, critical illness, retrenchment, or death. There are different kinds of credit life insurance that may apply to your credit agreement so is it advisable to check your policy terms and the protection provided by your particular policy, to help you make the right decision about how to manage your repayments in these difficult times.
What Is Credit Life Insurance?
Credit life insurance is a type of insurance policy that is designed specifically to repay a loan in the event of an untimely death. However, it is one way to protect your loved ones from financial hardship in the event of your death in the modern era of credit and debt-driven life. Typically, the lender incorporates the cost of credit life insurance into the loan, making it part of the borrower’s monthly loan payment.
Take note, as the outstanding loan balance is paid off over time, the face value of the policy decreases proportionately with it, until both reach zero.
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Further Explanation On Credit Life Insurance
Credit life insurance protects both lenders and the borrower’s estate. Depending on the type of credit, if a debtor dies without sufficient assets to repay the debt, the debtor’s estate may or may not be liable for the debt. However, certain lenders require borrowers to purchase credit life insurance when they take out a loan.
Regular life insurance is a better option for the majority of consumers than credit life insurance. Each month, the face value of credit life insurance decreases. Each monthly payment reduces the debt and the amount that the policy may have to payout. Additionally, because it does not require a medical exam, it may be more expensive than comparable life insurance policies.
Major Two Products That Include Credit Life Insurance
- Auto Loans
If an estate owns property that is subject to lender seizure in order to repay debt, credit life insurance is one way to protect that property. The policy also covers the co-signer in the event of the primary debtor’s death.
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Credit insurance is a type that reimburses you for your loan or credit card balance if you become unable to make payments due to death. Also, it applies to a disability, unemployment, or, in certain circumstances, property loss or destruction. Meanwhile, you can still define it as the type of insurance that protects businesses against non-paying clients. This takes us down to how the policy works and the five major types you should know.
How Credit Insurance Works
When you talk about credit insurance, you talk about supplemental service policy offered by your credit card issuer or lender, unlike life and auto insurance. This is either at the time of application or later in the loan’s life.
The policy premiums vary according to the benefit amount. In general, the more debt you have, the higher your insurance premium will be. Until you use the insurance or cancel the benefit, the insurance premium is frequently added to your monthly bill. In other instances, this is charged in one lump sum and is factored into the loan’s total cost. If you file a claim, the insurance proceeds are paid directly to the lender, not to you.
5 Major Types Of Credit Insurance
This policy comes in five varieties. However, four covers consumer credit products while the fifth classification is for businesses.
#1. Credit life insurance
This covers the balance on your credit cards in the event of your death. Meanwhile, it also prevents your heirs from having to pay off your outstanding credit card balance from your estate or, worse, from their own pockets.
#2. Disability credit insurance
If you become disabled, probably for a specified period of time, your minimum payment goes directly to your credit card issuer. Prior to the benefit taking effect, there may be a waiting period. As a result, you cannot add an insurance policy and submit a claim on the same day.
#3. Credit unemployment insurance
For instance, if you resign, the insurance benefit does not kick in. In some cases, the insurance company may require you to be unemployed for a specified period of time before paying your minimum payment.
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#4. Credit property insurance
You can say that this covers any lost personal property used to secure a loan. As a result of theft, an accident, or a natural disaster.
#5. Trade credit insurance
The policy protects businesses that sell goods and services on credit. It safeguards against the risk of clients defaulting on payments due to insolvency or a few other unforeseen circumstances. The majority of consumers will not require this type of insurance.
How Credit Life Insurance Works
This is how this policy works. A borrower obtains a mortgage on a new home and insures it with credit life insurance. If the borrower becomes permanently disabled or dies prior to paying off the mortgage, the policy will cover the remaining balance of the loan in full. The borrower’s estate, and eventually their beneficiaries and heirs, will receive title to the property. This way, the borrower’s family is not responsible for mortgage payments following the policyholder’s death. Lenders offer this only on large loans, such as mortgages and auto loans.
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Credit life insurance example
John Wick applied for a loan with his stepmother as a co-signer in order to purchase a new Porsche 550. Unfortunately, John died in an accident while driving cross-country in his new car. The stepmom is not forced to pay for the wrecked vehicle, because he was required to purchase credit life insurance via union.
What Credit Life Insurance Covers?
Credit life insurance typically covers the borrower’s remaining debt. In a typical policy, the borrower pays a premium which is frequently rolled into their monthly loan payment. Perhaps, to ensure that the lender is compensated in full if the borrower dies before the loan is paid off. The borrower’s estate and, ultimately, the borrower’s beneficiaries receive free and clear title to the underlying asset.
For instance, if you and your spouse jointly own a home and are still owing on the mortgage when one of you dies, your credit life insurance will cover the remaining mortgage debt.
Credit life is a kind of policy intended to cover the borrower’s outstanding debt in the event of his death. Perhaps, also covers his permanent disability or job loss. The policy’s premium decreases proportionately to the amount of the outstanding loan as the loan is paid off over time.
Cost Of Credit Life Insurance
While credit life insurance rates are determined by the amount of the loan, these policies can be more expensive than traditional life insurance. Numerous factors influence the cost of it, including the type of credit, the type of policy, and the loan amount.
“Generally, it costs a little more because the product carries a higher risk, which results in higher premiums,”.
You have to understand this increased risk arises. In the sense that it is a guaranteed issue product. Unlike most life insurance policies, the applicant will not be required to undergo a medical exam or disclose any health information because the loan balance is being insured, not the borrower’s life.
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Life Insurance vs Credit Life Insurance
Their names are almost identical, and both types of insurance policies provide benefits in the event of death. However, this is where the similarities end.
- Life insurance like navy federal protects policyholders and pays benefits to their beneficiaries in the event of their death.
- Credit life insurance protects a large loan and benefits the lender by repaying the remaining balance. This implies if the borrower dies or becomes permanently disabled before the loan is completely paid off.
Life Credit Union
Life Credit Union, founded in 1968, is your neighborhood, member-owned finance cooperative. Loans up to €75,000 are available at competitive rates with flexible repayment terms. Among their savings options is their Current Account, which features a globally accepted debit card and low monthly fees.
Because of their unique structure, you own Life Credit Union and benefit from its operations, whether through an attractive dividend (savings rate) or excellent value loans. Members can also conduct all of their daily financial transactions through our Current Account at their local, trusted credit union.
Another unique feature of Life Credit Union is that it automatically insures your savings. Pay off any outstanding loans to borrowers in the event of their death. However, terms and conditions apply.
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Navy Federal Life Insurance
Navy Federal life insurance as a Credit Union offers term and permanent policies to its members. You can select from a variety of policies, including term life insurance that does not require a medical exam, final expense insurance, and disability insurance. However, they also offer navy federal or military-specific life insurance policies.
As it turns out, planning for the future can actually help you accomplish today’s goals. Speak with a Navy Federal Financial Group financial advisor today to learn more about finding the mortgage and life insurance policies that are right for you and your family.
Credit life insurance reimburses a borrower’s debts in the event of the borrower’s death. Generally, you can obtain it from a bank during a mortgage closing, when you obtain a line of credit, or when you obtain a car loan. This type of insurance is critical if your spouse or another individual is a co-signer on the loan, as it protects them from having to repay the debt. Additionally, it protects your spouse or heirs in states that do not protect heirs from a parent’s unpaid debts.