Credit life insurance policies are often lumped together with life insurance. They have almost the same name, but while they share similarities aside from protecting someone from financial problems, they are actually very different. A credit policy can be given as a type of life insurance — specifically, a decreasing term life insurance.
So what does this mean, and why do you need to know what all this entails? In this article, ALIA will dive deeper into credit life insurance policies and examine the inner workings so you can better understand before signing up for this type of policy.
So Really, What Type of Life Insurance Are Credit Policies Issued As?
As mentioned, credit policies use a decreasing term life insurance strategy, which means that the insurance coverage will decrease over the lifetime of the policy.
So, why is that? Wouldn’t that be a harmful thing for you, the policyholder?
Not really. A credit life policy is something that you can purchase along with any kind of loan — including mortgages, car loans, home equity loans, and so on. While this policy is optional, it’s still very useful as a means to safeguard loved ones in case of your untimely death or other life-changing events.
A credit policy is meant to pay the rest of your loan should something happen to you, so the beneficiary is the lender, not your loved ones. With a credit policy, your family won’t have to face any financial issues, since the lender is already paid.
Why Are They Offered This Way?
So why are credit policies structured as decreasing term life insurances? First, let’s discuss the three types of life insurance policies:
- Term Insurance: This is the type of insurance that only provides coverage in a set amount of time — the “term.” If a policyholder dies during the predefined period, then their beneficiaries will be able to make a claim and get their benefits. Once the term expires, the policyholder can renew it, convert it into permanent insurance, or terminate it. This is the model that credit policies follow, but there is a key difference that we’ll discuss below.
- Whole Life/Permanent Insurance: As the name implies, a whole life or permanent insurance does not expire. When the policyholder passes away, then the beneficiaries will be able to access the death benefit.
- Universal Life Insurance: A universal life insurance can be classified as a type of permanent insurance. However, the major difference is that the policyholder can make some profit from the premiums. What they pay in excess of the insurance’s cost can be credited to the policy, increasing its value — the opposite of a credit policy.
Credit policies work like term life insurance, but the value decreases over time as you pay your debt. That’s because as you pay it, you’re also diminishing the amount you owe. If the unthinkable happens to you near the end of your loan term, your family won’t need to pay a huge amount to the lender. If you do survive after the term ends and you’re able to pay the loan, then the remaining funds can be given to your beneficiary.
How is Credit Life Insurance Useful?
A credit policy is optional, but many lenders will offer it along with your loan. This is meant to protect your assets if you pass away or provide the funds needed to pay off any debt.
- Protects the Policyholder’s Family: If your spouse is a co-signer of a mortgage or if you’re a breadwinner, then the credit policy will protect your loved ones from financial trouble. Since the debt will be paid, they won’t have to face any outstanding financial obligations.
- Provides Peace of Mind: That’s just really how insurance works. But if you have concerns about leaving your family with debt after you’ve passed away, then this will give you the assurance that it’s going to be okay.
How Can I Sign up for This Type of Policy?
Enrolling in a credit life insurance policy can be a bit tricky on your end, especially if you’re not familiar with the jargon involved in the industry. However, unlike most life insurance policies, this one has fewer requirements in general. For example, most carriers won’t require medical exams, and they’re often offered along with loans.
Your agent will help you navigate the entire process and ensure that your questions are answered. Signing up will be more or less the same as the process of signing up for life insurance. That includes:
- Evaluation of Risks
- Medical Questions
- Submission of Paperwork and Relevant/Required Documents
What is a life insurance credit policy?
It’s a policy meant to pay off a person’s debts to a lender in case of death or disability.
Is life insurance a type of credit?
No, life insurance is not a type of credit in the conventional sense. It’s simply a contract that guarantees benefits to beneficiaries when the policyholder dies.
Who owns a credit life insurance policy?
The person who pays the premium is the policyholder and the owner of the credit life insurance policy.