Credit Insurance

What it protects against

Credit insurance will pay off a loan should the insured die, become disabled or involuntarily become unemployed, depending on the specific product. Credit property insurance protects against loss of an item you purchase, but this kind of coverage is usually provided by homeowners or renters insurance.

How it works

Insurance is on the amount owed, so the length of coverage depends on the duration of the loan. The amount of coverage declines or rises with the loan balance, but the insurance cost per dollar of debt remains the same. Life insurance proceeds are paid directly to the creditor. For disability or unemployment credit insurance, the insurer makes payments to the creditor to keep the loan in force, although the duration of payments may be limited by the policy terms. Policy language will determine what kinds of disability or unemployment qualify for benefits. It also will identify a waiting period before benefits begin and how long benefits will continue.

Who needs it

People who are uninsurable or who cannot afford the face amounts of traditional life insurance products. (Credit life insurance is offered without underwriting, and it can cover small amounts while life insurance products generally have larger minimum face amounts). Borrowers whose lenders require credit insurance.

Who may not need it

Young people who can buy or already have traditional life insurance, especially term insurance, for considerably less cost per dollar of coverage than that provided by credit life. Older people who can purchase term life insurance for less than credit life. Credit life insurance has been a fading product line since 1975. In recent years, credit insurance has run into competition from large banks that offer debt-cancellation and debt-deferment products. Also, employees may already have life insurance through their employer. Credit disability is normally more expensive than credit life.

When to buy it

When you take on consumer debt.

How to pay for it

Premiums that are generally part of the loan or credit card payments.

Terms to Know