What Is Credit Insurance?

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Imagine you’re getting up there in years and living off of your retirement account. You suddenly need to purchase a new big-ticket item, like a car, and worry about leaving your loved ones with the debt if you pass away before fully paying off the auto loan. Or what if you unexpectedly lose your job through no fault of your own and don’t know how you’re going to cover your monthly mortgage payments? Credit insurance can help.

Credit insurance is a type of insurance policy that pays off your debt in the event of an unexpected situation such as death, disability or unemployment. Take a closer look at the ins and outs of credit insurance to get a better idea of if the product works for your needs.

What Is Credit Insurance and How Does It Work?

Credit insurance is designed to step in and make your payments when you can’t. It can provide you with peace of mind, knowing you won’t saddle your loved ones with debt if you’re unable to work — or end up passing away — before you pay off the loan in full.

You might be able to buy credit insurance through your insurer, bank or credit union. But in most cases, a lender will ask you during the loan approval process if you’d like to purchase a credit insurance policy. The credit insurance policy might even be included in your loan proposal. But don’t worry — credit insurance is optional, and you can decline it.

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Should you go ahead with a credit insurance policy, you’ll be covered for missed payments or the full debt amount, depending on the policy you chose. The lender will be named as the beneficiary of the policy, and the payments will be made directly to it, with any surplus paid back to your estate.

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What Are the Types of Credit Insurance?

Four types of credit insurance cover different types of debt and unforeseen situations. The types of credit insurance are:

1. Credit Disability Insurance

Credit disability insurance might be worth considering if you work in a high-risk job or worry about your health because it would make payments on your behalf to your lender should you unexpectedly become sick or injured and unable to work. Credit disability insurance will make payments until you return to work. Policies usually come with contract limits on how many payments the insurer will make.

2. Credit Life Insurance

Credit life insurance is similar to life insurance. The insurance company pays off the decedent’s remaining loan balance directly to the lender named as the beneficiary. Any money left gets paid to the estate for heirs to inherit. Credit life insurance could be a good choice if you’d like to protect assets and savings you wish to leave to your heirs or if someone has cosigned the loan with you.

3. Credit Property Insurance

In the event you use personal property as collateral for your loan, credit property insurance covers the property if it’s accidentally destroyed or lost due to theft or a natural disaster. You can elect to buy:

  • Single interest coverage to only cover the lender’s interest in the lost or destroyed collateral
  • Dual interest coverage to protect both the lender and you, the borrower
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4. Involuntary Unemployment Insurance

Involuntary unemployment insurance protects you if you’re involved in a labor dispute, get laid off or lose your job through no fault of your own. It’s also called involuntary loss of income. The policy will pay all or a portion of your monthly loan payment until you get back to work.

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What To Consider Before Getting Credit Insurance

Before you buy credit insurance, it’s important to understand that in most cases, your debt is not passed on to your loved ones directly when you die. The loan balance will be paid from your estate — the assets you leave behind, including property, savings and investments — before anything can be inherited by your heirs.

There are two exceptions: a spouse or family member who co-signed for the loan would be responsible for the balance when you die, and your spouse must use community property to pay off the debt if you live in a community property state. The community property states are:

  • Alaska
  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

More on Debt: What Happens To Your Debt When You Die?

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How Much Does Credit Insurance Cost?

The price of credit insurance depends on the amount of debt you want to cover, the type of credit insurance policy and how long the insurance will pay your debt.

Credit insurance is expensive compared to other types of insurance, according to the State of Wisconsin Department of Financial Institutions. Here is a comparison of credit insurance versus term life insurance with $50,000 in coverage:

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Cost of Credit Insurance Comparison

Age Credit Insurance Term Life Insurance
30 $370 $78
40 $370 $92
50 $370 $163
60 $370 $321

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Which Type of Credit Insurance Pays Your Debt?

Of the four types of credit insurance, three will pay part or all of your debt. They are:

  • Credit life insurance, in case of death
  • Credit disability insurance, in case of inability to work due to injury or illness
  • Involuntary unemployment insurance, in case of job loss through no fault of your own

Credit property insurance doesn’t make payments to the lender on your behalf. It protects the property used to secure the loan instead.

Plan Ahead: Debts To Tackle Before You Retire

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Is Credit Insurance Worth It?

When you’re worried about leaving loved ones stuck with your debt or without an inheritance, it pays to consider less expensive alternatives to credit insurance, like term life insurance. In other cases, such as disability or job loss, weigh the cost of the policy before you decide. Saving several months’ worth of money in an emergency fund or having disability insurance might be a more economical alternative.

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