Why Do Creditors Offer Credit Life Insurance?

Upon securing a personal loan, whether it be for new car or opening up a credit card account, the financial institution will likely present you with a credit life insurance offer. While the offer might appear tempting, you will need to understand what is the purpose of the policy.

There is a certain euphoria that can occur when purchasing a new car. In addition, you will need to fill out a lot of paperwork, especially if you buying or leasing the vehicle on credit. Usually, the financial institution that loans you the money will offer you the opportunity to purchase credit life insurance through an insurance company that will insure the lives of its credit borrowers.

While credit life insurance does not usually require any medical underwriting, the amount of coverage is determined by the balance of the loan (e.g. car loan or credit card balance). As the loan balance decreases, the amount of life insurance on the insured is decreased. The reverse would occur if the balance would increase. Therefore, the credit life insurance policy is term life insurance that pays off the loan balance, in the event of your early demise.

The beneficiary of the credit life insurance policy will be the financial institution that loaned you the money. You might not need the additional life insurance coverage if you already have adequate life insurance that could be used to pay off the debt. It is important to consult your financial planner or tax accountant to determine whether you need credit life insurance.