Credit Life Insurance might be the least understood Life Insurance policy, but it can save a borrowers’ family so much trauma and embarrassment if the borrower was to die without fully paying a loan.
The policy is perfect for individuals who are sole breadwinners and want to protect their families from financial burden caused by their debts once they die. In this case, the insurance company shoulders the outstanding repayment of the loan, preventing the borrower’s dependents from inheriting their breadwinner’s debts.
What is Credit Life Insurance
Credit Life Insurance is a type of term Life Insurance policy that helps repay a borrower’s loan in the event of death or permanent disability. It is typically offered at the point of loan collection such as a personal loan, car loan, business loan, mortgage or education loan. Once the borrower dies before the debt is fully repaid, the credit life policy settles the loan balance without stressing the borrower’s dependents.
Who Is the Beneficiary of Credit Life Insurance
Whilst Credit Life Insurance protects your loved ones from inheriting debts, they do not receive any money from this type of life insurance. Rather the lenders are the beneficiaries as the payout goes to them. Your premiums, however, stay the same throughout the length of the policy regardless of how reduced the loan becomes.
How Does Credit Life Insurance Work
Credit life insurance works by ensuring that lenders receive monies owed them in an event of a debtor’s demise. The below scenario paints a picture of how it works:
1. Policy Purchase:
Borrower A walks into a car shop and inquiries about purchasing a car where he pays 10% of the cost and the rest 90% under a loan contract. The lender offers him credit life insurance as an option. The borrower chooses to purchase this insurance policy which is designed to cover the outstanding loan balance in case of the borrower’s death.
2. Premium Payments:
The borrower begins paying regular premiums for the credit life policy. The premiums are often included in the monthly loan payments, making it convenient for the borrower to pay.
3. Policy Coverage:
In the course of time, the borrower dies before the loan is fully repaid. After getting knowledge of the death of the borrower, the lender notifies the insurance company and files for claims. The credit life policy pays off the remaining balance of the loan. This ensures that the borrower’s family and loved ones are not responsible for repaying the debt.
4. Loan Payout:
The beneficiary of the credit life policy, which is the lender, receives the payout to liquidate the outstanding loan amount on the policy.
What are the Benefits of Credit Life Insurance
Credit life offers several benefits which include:
1. Loan Protection:
If the borrower dies before fully repaying the loan, credit life insurance settles the outstanding balance and ensures that the burden doesn’t fall on the borrower’s family.
2. Financial Security:
It provides financial security to the borrower’s loved ones by pushing the debt responsibility to the insurance company instead of the dependents.
3. Peace of Mind:
Since the borrower’s family knows that their loved one’s debt will be handled by the credit life policy, they gain peace of mind and focus on other aspects of their lives.
How Much Does Credit Life Insurance Cost
Credit life premiums are not tied to a single cost, it varies. The costs depend on the amount of loan taken, the features of the policy and the insurance company selling the policy.
Credit life insurance is a great insurance policy that provides peace of mind for borrowers. Whether you’re buying the plan for your car or mortgage loan, it’s important you understand the terms and conditions of the policy.
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