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You shouldn’t buy credit life insurance!

Almost anyone who you would talk about getting credit life insurance would tell you the line: you shouldn’t put money in credit life insurance. But what makes credit life insurance a bad purchase?

The other day when you have spoken to the eloquent sales person at the car lot he almost convinced you that credit life insurance is the solution to all your owes about not being able to repay the loan. He said…

The credit life insurance would restore your peace of mind since it would take care of the loan burden if you die (God forbid!) unexpectedly before repaying the loan. If you don’t have this protection then your spouse and family would be left with the duty to compensate the lender. And, you of course know how these loan sharks are, don’t you??

Now, when it sounds so good then why shouldn’t you purchase it? For that you need to know what credit life insurance is.

What exactly is credit life insurance?

Credit life insurance is typically a term life plan in which the term matches the term of the loan and the coverage level matches the loan amount. It promises to pay-off the loan if you die before repaying the it so that the lender doesn’t suffer the loss.

Now, what are the arguments against credit life policies?

If you can buy life insurance, you shouldn’t purchase credit life insurance since it would be redundant in that case. if you have enough life insurance coverage that it would take care of all the financial needs after your death, that’s sufficient.

Credit life insurance plans are greatly overpriced. If you do some research in the market and have no health issues that may prevent you from getting life coverage from the market, you don’t need protection against loans.

It’s a decreasing term life plan, i.e. the coverage level would decrease with the loan amount, but the premium rate isn’t attuned to the decreasing level of the policy. Hence, you would see very little change in the premium rate as compare to the death benefit. The credit life plan may have several other limitations too.

You AREN’T required to sign the insurance policy papers in order to receive the loan. It’s the sales people who would try to create the impression that you wouldn’t get the loan if you don’t buy the policy because it earns them great commission. If you face such situation complain against the salesperson and find another lender.

Most importantly you should know that in credit life insurance the beneficiary would be the lender and your family wouldn’t receive a dime upon your death. Hence, if you want to plan a perfect life for you children you may get a life insurance policy and not credit life insurance.

Anyway, at times a credit life plan may make a sense to people who can’t otherwise get life insurance at standard rates from the market, i.e. people with severe health issues and pre-existing conditions.