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By Doreen Martel

What is credit life insurance and do I need it?

Credit life insurance is a form of insurance that guarantees a creditor will be paid in full should the debtor die. If a consumer dies before paying off the balance of a loan, the lender will be paid the outstanding balance. These types of policies are designed to ensure the debt to the lender is paid off without placing a financial burden on the estate of the decedent. When these policies are taken out, the lender is the beneficiary of the policy even though the consumer makes the payment of premiums.

What types of loans may need credit life insurance?

Generally, loans for furniture, appliances, automobiles or recreational vehicles may ask borrowers to sign up for credit life insurance coverage. According to the National Association of Insurance Commissioners (NAIC), consumers have the right to refuse to take out this coverage. If a lender insists they will not make the loan without the coverage, the borrower should report their refusal to their state insurance department. Lenders also cannot include credit life insurance premiums in a loan without the full knowledge of the borrower.

Who should consider credit life insurance?

Consumers should weigh the risks and benefits of credit life insurance carefully. For some, this coverage is a good option. For example, if someone purchases a motor home, boat or other large item, they may be financing it for several years. If for any reason the consumer does not have other life insurance, or for some reason they are not able to obtain insurance through a regular policy, credit life insurance may be a good option. Because the policy is designed to pay off outstanding debt, the creditor gets paid what they are owed without an additional burden to the estate.

How much does credit life insurance cost?

Rates vary depending on policy terms as well as the amount of money borrowed. While most lenders may offer this coverage, in many cases, a consumer who wishes to obtain this type of coverage may find more competitive rates if they shop around. Borrowers have the right to purchase these policies from any insurer they wish; the lender cannot decide on their behalf. Premiums for credit life insurance depend in part on the insurance company issuing the policy and whether or not the policy requires a one-time or an ongoing monthly payment. Consumers should ask about total costs prior to agreeing to accept this type of coverage.

Does credit life insurance require a health exam?

Perhaps the most significant benefit to these types of policies is the lack of requirement of a medical exam. Because the policy is covering an asset versus a person, the policy is typically based on the value of the asset and not the health of the borrower. However, before signing any insurance coverage application, consumers should be aware of any exclusions that may apply.

Consumers need to be aware of the costs of credit life insurance as well as any limitations that may apply. In some rare circumstances, the policy could lapse before the loan is completely paid off, leaving family members to worry about the balance. Informed consumers should ask questions, read the insurance policy language and determine if credit life insurance is a good option for them before purchasing.

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