The face value of credit life insurance coverage decreases over time as the debt is paid off. The debt and the life insurance policy both eventually reach a zero value if the insured doesn't die before all the payments can be made.
A credit life insurance policy is very similar to a normal term life insurance policy, except that the award amount of the policy is used to pay off the insured's debt. A lender is usually named the beneficiary of the policy and if anything of the award amount remains, this amount is applied to the estate of the borrower.
Lenders sometimes require that this type of insurance be purchased as part of the loan agreement. That way, if the borrower is unable to pay back the amount of the loan themselves, they have the proceeds of the insurance policy to rely upon.
Crunching the Numbers
The cost of credit life insurance is usually higher than the cost of other plans. Much higher! As an example, the amount needed to be paid for premiums for a healthy person at age 22 is $342 dollars at a popular company. The same amount of term life insurance is set at a rate of $69 dollars for the same $50,000 of term life coverage. So you can see, the premium amount is much higher for credit life insurance.
The premium paid on credit life insurance is always in-line with the debt amount you are trying to pay off with the policy. So, the premium rate may start high because the debt amount is high but decreases over time as the debt amount is reduced through the payments to the creditor. The creditor is always the beneficiary on these types of policies and never the insured's family.
State laws and insurance company policies may limit the amount of coverage you can receive within a credit life insurance policy. This effectively limits the amount of the award benefit as well.
Do You Qualify?
The question may arise of whether or not you are a good candidate for credit life insurance. This type of insurance is suitable for anyone who carries debt that may affect the survivors in the event of their death. Generally, when a debtor dies, things like cars and houses can be repossessed. If there are surviving family members living in the household, then these family members would have their living situation and transportation at risk. A credit life insurance policy can ensure that this doesn't happen and the house and car loans get paid in full, as an example.
Paying for credit life insurance through the premiums may have required payment plans. Required payment plans eliminate the risk that interest amounts on the loans could exceed a certain amount. Using one large lump sum payment to the policy, the entire credit life insurance policy can be paid off using a single payment.
You should be aware that many banks require credit life insurance policies from you before you get to take out a loan. Credit life insurance policies only make sense to take out when they could adversely affect the life of the family survivors. Otherwise, it would just be a waste of time and financial resources.
The great thing about credit life insurance and the main reason for its creation is to give borrowers the security of knowing their debt will be paid off regardless of whether or not they survive to pay the debt in full. So if an insured dies while the policy is active and all premiums are paid in full, the debt will be covered by the insurance policy through the award amount. This ensures that past debts can NOT be a burden to the family because the insurance company will cover the remainder of the loan amount.
An Insurance Company’s Perspective
For insurance companies, this represents a risky venture. The insured person may or may not survive long enough to make enough premium payments to cover the loan amount. But if they do, the insurance company will stand to make a hefty profit from the total premium amounts paid. In exchange for the additional amount paid through the premiums that are equal to higher than the amount of the loan, the insured is guaranteed that the debt will be paid through the award amount.
Underwriting is a big part of credit life insurance because lenders want to ensure that they will receive repayment on the loan. Insurance companies know this and won't insure a person if they are of ill health. If they are, the premium amount skyrockets.
Sometimes, in order to sell more credit life insurance policies, insurance companies are notified when you buy a new house or car. They want to give you an easy way of securing the repayment of the debt. Whether or not you choose to take them up on the offer is up to you but credit life insurance is an effective means of making sure your family won't bear the burden of being without a house or car if you pass away. Repossession of these things could mean big trouble for a family.
The more risk involved with the person who is shopping for a credit life insurance policy, the higher the premium will be. Eventually, as the insurance company hopes, you will apply enough premium payments to zero out the debt before you die. The additional amount you pay goes into the insurance companies pocket and in exchange you are given the security of getting the debt paid if you die before the amount is paid back. Costly to the insured but effective means of getting debts paid no matter what.