There is some degree of risk when taking out a loan, especially if you borrow a lot of money. Protecting others from taking on their debts if you die can be a natural concern. However, debts are rarely inherited, which means that your loved ones will probably not be responsible for your loan. In some situations, however, your debt can have a negative impact on the ones you leave behind. Credit life insurance helps to reduce these risks by repaying the lender if you die before paying off the loan. But this type of insurance is not always necessary and can be very expensive. Before buying a policy, consider the costs and explore alternatives such as term life insurance, which typically offers the same type of protection at a lower price. What is credit life insurance? Credit life insurance pays your loan if you die before paying off your debt. The nominal value of the policy is linked to the loan amount; as you pay off the debt, the amount of coverage decreases. If you die before paying off the loan, the insurer repays the rest of the debt. Life insurance does not protect you as much as it protects the creditor. The premiums remain unchanged for the duration of the policy, regardless of the duration of the loan. And lenders are almost always the beneficiaries of credit life insurance policies, which means that the payment goes directly to them – not to your heirs – if you die. Types of Credit Insurance Credit life insurance is a specific type of credit insurance that pays if you die. Other types of credit insurance repay loans in less extreme circumstances, such as involuntary unemployment, disability, theft or destruction of personal property or leave. What does credit life insurance cover? Credit life insurance can cover mortgages, auto loans, education loans, bank loans or other types of loans. In general, the amount of insurance cannot be higher than what you owe on the loan. Your state may set maximum coverage limits for credit life insurance policies. For example, credit life insurance policies for New York mortgages generally cannot exceed $ 220,000. Therefore, if the mortgage amounts to $ 440,000, the credit life insurance policy can cover only half of the loan. But generally you don't need to buy coverage if you don't want to. In fact, according to the Federal Trade Commission, lenders cannot refuse a loan application based on the borrower's refusal to purchase optional credit insurance. It is also illegal for lenders to include credit insurance without your knowledge or consent. Credit Life Insurance Alternatives When buying loan insurance, credit life is not your only option. Consider the following alternatives before purchasing a policy. Credit life insurance or term life insurance Standard term life insurance can repay your loans if you die, and is generally cheaper and more flexible than credit life insurance. The indemnity in the event of death remains unchanged for the duration of the policy and pays regardless of the loan amount. In addition, you can choose a life insurance beneficiary for the term policy. This means that your heirs – not the lender – receive the money, no matter how much of the loan you have paid, and can use the funds for any purpose. Existing Life Insurance Policies Instead of buying more coverage, you can use an existing life insurance policy or a permanent life insurance policy to cover a loan. Keep in mind that lenders may want to see proof of coverage before proceeding. Also, make sure you are comfortable with allocating some of the existing policy funds to cover the loan, especially if you purchased the policy to cover specific expenses. Traditional Savings Account Existing savings or investment accounts can be an excellent financial safety net. If the funds in your savings account can help you cover any outstanding debts after your death, you may not need insurance. Is Credit Life Insurance Right For You? You probably don't need credit life insurance if your only concern is debt inheritance. This is because your debt rarely passes to your heirs when you die. Instead, your property settles your debts using your assets. If there is not enough money to cover what you owe, the debt is generally not paid and family members are not required to pay it. However, there are times when an unpaid loan can have a negative impact on your wealth planning. Life insurance can be a useful tool in the following scenarios: You don't want your assets to pay off your debts. When you die, the asset for which you borrowed money – such as a car or a house – can be sold to repay the lender. This can reduce the amount left to your heirs. Loan insurance covers all outstanding payments in the event of death, keeping the debt out of your assets. You want to protect co-signatories. When you take out a loan, you are equally responsible for the debt. Credit life insurance pays all outstanding debts in the event of death, removing the burden from all surviving collaborators. You live in a community-owned state and want to protect your spouse. In states with community property laws your assets – and your debts – typically pass on to your spouse. A credit life insurance policy pays the loan so that the spouse does not have to. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin have been with community property laws. How much does credit life insurance cost? Credit life insurance premiums vary between states and are based on the size and type of loan. Costs can be higher than other life insurance products due to two key factors: coverage is generally guaranteed, regardless of one's health. As with most guaranteed life insurance policies, insurers generally apply higher premiums when they don't know your medical history because the risk of insuring you increases. Not all credit life insurance policies are guaranteed. Age, health and working status can affect eligibility, sometimes lenders insert insurance premiums into the loan payment. It might seem like a good idea, but it can cost more. You are practically borrowing money to pay insurance premiums, which increases the interest payable. Can you cancel credit life insurance? You may be able to cancel coverage and receive a premium refund if you need to close a credit life insurance policy in advance. However, cancellation policies vary among lenders. The ability to cancel the policy can be useful if you pay most of the loan and don't want to continue paying the high premium for less coverage. Before purchasing a policy, ask if it is possible to cancel the coverage early and what kind of refund the possible policy is available.