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Mortgage Credit Life Insurance

Learn about Mortgage Credit Life Insurance

Credit Life Insurance Definition

Credit life insurance is an insurance policy taken out by the borrower for the benefit of the lender.

What is Credit Life Insurance?

If you die, will your family have trouble keeping up the mortgage and holding on to the house? If the answer is yes, you may want to consider credit life insurance. It's coverage that completely or partially pays off a loan following the death of the borrower.

Some lenders require credit life insurance, which can be rolled into the loan. Credit life is designed to cover a debt in case of death, to protect your mortgage loan.

How Does Credit Life Insurance Work?

In a typical credit life policy, the borrower will pay a premium, which is often added to their monthly loan payment that allows the lender to be paid in full in the event the borrower dies before the loan is fully paid off.

Title to the underlying asset (for example, your home) is then transferred free and clear to the borrower's estate and ultimately, to the beneficiaries of that estate.

Credit Life is commonly offered with auto loans and home loans by the lender at the time of purchase of a loan.

While the price of a policy will depend on the loan amount, credit life policies can cost more than regular life insurance: such as, term life insurance.

It's generally a little more with credit life insurance because there's a greater risk associated with the product and that makes for higher premiums.

That higher risk comes into play because credit life insurance is what's known as a guaranteed issue product, meaning that eligibility is based solely on your status as a borrower.

Unlike most life insurance policies, the applicant won't be asked to take a medical examination or disclose health details because what's being insured is the balance of the loan, not the life of the borrower.

So, you would pay more for credit life compared to a fully underwritten mortgage term life insurance providing the same amount of protection for the duration of your home mortgage loan.

Why Buy Credit Life Insurance?

If credit life insurance costs more than regular term life insurance and is intended to benefit the lender, why would someone buy it?

That's a good question.

You are paying for an amount of insurance coverage that is declining as you pay down the debt, so you are paying for less and less protection each month.

If you're not insurable, (meaning) you're not able to buy life insurance through regular channels it would be an option since it is guaranteed approval. Credit life won't require a medical exam.

In some cases, a lender may require a borrower to take out a credit life insurance policy.

That’s generally the case with mortgage loans, but only in instances where the buyer doesn't have a down payment of 20 percent of the home's cost.

When that happens, you might have to buy credit life at the lender's insistence to get the loan. 

Over time, a borrower will increase his or her equity position in the house and when it crosses the 20 percent threshold, the borrower can ask his or her lender to cancel the policy.

So, you don’t need the policy for the entire duration of your mortgage loan. 

It's a good idea to find appropriate life insurance coverage so that your loved ones will be able to make the mortgage payments if something happens to you.

A level term life insurance policy can provide the protection needed for the duration of your home loan at the lowest cost.

With standard life insurance policies, coverage exclusions can be wide-ranging and vary a great deal state by state. But because credit life insurance is focused solely on the asset and not the person, exclusions don't generally come into play. 

However, one exception to that rule may be triggered by a suicide within two years of starting your life insurance policy.

Taxes on Credit Life?

As for taxes, there's little for the consumer to worry about with credit life insurance.

Since the proceeds of the insurance policy go directly toward paying off the mortgage loan and the insurance provider is the beneficiary of the policy, not the family members, there wouldn't be any estate tax or inheritance tax.


Credit Insurance

The next time you apply for a mortgage loan, you may be asked if you want to buy mortgage credit life insurance, or it might already be included in your mortgage loan proposal.

Credit life insurance protects the mortgage loan on the chance that you can't make your payments. 

Credit insurance usually is optional, which means you don't have to purchase it from the lender.

In fact, the Federal Trade Commission (FTC), the nation's consumer protection agency, says it's against the law for a lender to deceptively include credit insurance (or other optional products) in your loan without your knowledge or permission.

Types of Credit Life Insurance

There are Four Main Types of Credit Insurance:

  1. Credit life insurance pays off all or some of your loan if you die.
  2. Credit disability insurance, also known as accident and health insurance, makes payments on the loan if you become ill or injured and can't work. 
  3. Involuntary unemployment insurance, also known as involuntary loss of income, makes your loan payments if you lose your job due to no fault of your own, such as a layoff.
  4. Credit property insurance protects personal property used to secure the loan if destroyed by events like theft, accident or natural disasters.

Shopping Tips

Before deciding to buy credit insurance from a lender, think about your needs, your options, and the rates you're going to pay. You may decide you don't need credit insurance. If you do, credit insurance can be an expensive form of insurance to protect your mortgage loan.

For example, it may be less expensive and more practical for you to get a term life insurance plan rather than credit insurance.


Questions To Ask When Buying Mortgage Credit Life Insurance

How much is the premium? 

Will the premium be financed as part of the loan? If so, it will increase your loan amount and you'll pay additional interest, and more for points (if points are on your loan).

Can you pay monthly instead of financing the entire premium as part of your loan?

How much lower would your monthly loan payment be without the credit insurance?

Will the insurance cover the full length of your loan and the full loan amount?

What are the limits and exclusions on payment of benefits - that is, spell out exactly what's covered and what's not.

Is there a waiting period before the coverage becomes effective?

If you have a co-borrower, what coverage does he or she have and at what cost?

Can you cancel the insurance? If so, what kind of refund is available?

Before you sign any loan papers, ask the lender whether the loan includes any charges for voluntary credit insurance. If you don't want credit insurance, tell the lender.

If the lender still pressures you to buy insurance, find another lender. And review your loan papers carefully to be sure they have been drawn up correctly. 

Lenders can't deny you credit if you don't buy optional credit insurance - and if you don't buy it directly from them. 

Source: FTC Credit Insurance

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