Things to consider when purchasing Credit Life Insurance
A Credit Life Insurance policy is in some ways similar to conventional life insurance products like Term-Life Insurance and Whole-Life Insurance. All three products pay out when the insured dies by natural or accidental causes. Credit Life is offered to borrowers who have recently taken a new loan, including mortgage, auto and personal loans. Insurance companies usually offer these products. All life insurance policies make payment to the policy “beneficiary.”
What are the differences?
There are several very important differences between traditional life insurance products and Credit Life. The first is the amount of coverage.
Whereas traditional policies usually have a fixed coverage amount, Credit Life offers what is called “truncated” coverage. This means that the coverage amount declines as the balance on the loan declines. Let’s say you purchased two $100,000 policies at the time you closed on your $100,000 mortgage loan for a new home: one a Credit Life policy and the other a Term Life policy. In a Term Life policy, the coverage starts at $100,000 and remains at this level throughout the term of the policy. However, in the Credit Life policy, the coverage begins to decline based on the outstanding balance on the loan, and coverage decreases with every payment you make. Unfortunately, your monthly payment remains the same even though your coverage is dwindling little by little every month.
Another important difference is the beneficiary. With a Term Life policy, you name a beneficiary who will receive the money from the policy should you die. Once the beneficiary receives payment, she or he uses the funds however the beneficiary or the executor of your estate deems necessary. With a Credit Life policy, the sole beneficiary on the policy is the lender. Upon your death, the insurance company would pay off the outstanding balance on your loan, leaving no proceeds for the executor of your estate.
After I bought my home, my mailbox filled with offers for Credit Life. How did these companies know we bought a new home?
This most likely happened one of two ways. It’s quite possible that your new lender sold your name to a company (or several companies) who solicited you. Quite often your lender may be involved in a joint venture with an insurance company that will solicit you. This makes it quite rewarding for your lender if you purchase the Credit Life policy. The other way your name could have been added to the mailing list is a little less obvious. Many people do not realize that real property ownership is a matter of public record in almost every state. This means that anyone can research what is recorded in public records (for example, Ownership Deed, Mortgage Deed or Deed of Trust), making some details of the transaction available to anyone. This allows sales people to obtain your name and address for solicitation purposes.
I need to protect my family. What should I do?
Life insurance is very important and should be given serious consideration. However, considering what Credit Life costs and what it provides, you can usually obtain a better policy with much more coverage if you buy a Term Life policy. If you purchase enough coverage, your loan balance could be paid with enough proceeds left over to take care of your beneficiary. Contact an insurance agent who specializes in life policies and explore the available options.