Life Insurance

Credit Life Insurance, Explained

signing paperwork
As you think about your estate plan and how to protect your loved ones financially, you may wonder what happens to your debt when you die. Sometimes, outstanding balances are paid from your estate (as in, the assets you leave behind), which can diminish the amount of money you allocate for your loved ones.

Loans backed by assets, like a mortgage or auto loan, may need to either be repaid or have the asset sold to repay the loan. Some people turn to credit life insurance to avoid such financial and emotional turmoil for loved ones. It can help cover outstanding debt balances when you pass away, but it comes with some important drawbacks to consider. 

What is credit life insurance?

Credit life insurance is a financial policy that helps cover outstanding debt if the borrower passes away during the loan term. It's similar to life insurance, except it's more restrictive and provides the lender with a death benefit, not your family. 

Note that Ethos sells term and whole life policies. The death benefit with our policies gives your beneficiary flexibility, including the ability to use the payout to cover debts. Ethos does not sell credit insurance, but it's important to understand what it is as you consider your life insurance options. 

Here's how credit life insurance works:

When you take out a loan, the lender may offer a credit life insurance policy. The lender adds a monthly premium to each loan payment you make. Should you pass away before the balance is paid off, the remaining balance is considered paid in full. 

If there's an asset tied to the loan, like a house or a car, your selected beneficiary gets full ownership of that personal property.

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Other types of credit insurance

There are three types of credit insurance: credit life, disability, and unemployment insurance. Here's how the other two types of credit insurance work and how they stack up compared to credit life. 

Credit disability insurance: This insurance policy is like credit life, except that it helps pay down your outstanding loan balance in the event you become disabled rather than if you pass away. You still make an extra premium payment to your lender. The policy comes with a waiting period, typically lasting either 14 or 30 days. If you're still considered disabled and unable to work after that period, your insurance policy kicks in, and minimum payments will be made to your lender until you recover. 

Credit unemployment insurance: Similarly, credit unemployment insurance covers loan payments when you're laid off or fired (voluntarily quitting doesn't qualify). There's a waiting period, and if you're still unemployed after that period of time, minimum payments are made to your lender. 

How much does credit insurance cost?

Expect credit life insurance to cost more than a more traditional type of life insurance policy. The reason is since it's a form of guaranteed insurance, you can get approved regardless of age and health status. But that means you'll have to pay more for the risk the lender takes on. 

Even though you're paying more, your coverage decreases over time. The premium remains the same throughout the life of the loan; it doesn't change based on age, economic conditions, or your loan balance. That means even though you're reducing your balance each month as you make payments, you're paying the same amount of money for coverage. The value of the benefit decreases because you don't owe as much.

Advantages of credit insurance policy

There are two key benefits of taking out a credit life insurance policy.

No medical exam: Since coverage is guaranteed, credit life insurance is accessible coverage for anyone who needs life insurance. It could be a good option for older borrowers or someone with a pre-existing condition since standard life insurance could be cost-prohibitive. However, it's still worth exploring your options. 

Note that although Ethos does not offer credit insurance, we do offer life insurance policies with no medical exam. We also have whole life insurance available for seniors, up to age 85.

No tax implications: Another characteristic of credit life insurance is that the death benefit is paid directly to the lender, so no estate tax is incurred. However, the same holds true for regular life insurance. Compare all terms of your policy quotes to ensure you pick the best one. 

Disadvantages of a credit insurance policy

There are a few downsides to consider before getting a credit life insurance policy:

More expensive policy: A credit life insurance policy is likely to be more expensive than life insurance. Even if you're young and healthy, you'll probably still be subject to higher rates folded into your monthly loan payments. 

Benefits amount reduces over time: Even though your insurance premium payments remain consistent over the loan term, your coverage lessens. 

Less flexibility for your loved ones: Investing in a credit life policy rather than a term life insurance policy gives your family less financial flexibility if you pass away. With a term life policy, your beneficiary (such as a spouse) receives a lump sum of cash as a death benefit. They can use it however they see fit, such as paying off debt or for living expenses if the household income is reduced. 

Bottom line

A credit life insurance policy has the potential to provide you with peace of mind that your most significant debts will be covered when you pass away. But it's not the only option out there. 

Use Ethos to compare term life insurance policies for coverage that's both comprehensive and flexible for your family.

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