When you are ready to sign the papers to buy a car, you will be offered a myriad of add-ons – extended warranty, rust protection, life-time oil changes, and dent repair. One of the products the dealership will try to sell you is credit life insurance. They will tell you that it will pay off the auto loan in case you die. But do you really need it?
Credit Insurance
Credit insurance policies are insurance policies that will pay off a loan in the event of your death. These policies are commonly offered with a car and home loan. You will sometimes see these products offered with furniture and appliance purchases.
It is important to realize that these policies are very different from life insurance policies. Life insurance policies provide a cash payment to your beneficiary in the event of your death. Life insurance is not tied to any loan.
These policies are typically requested by the lenders because they want the loan to be paid off if the borrower dies. You, the borrower will be paying for the credit insurance policy and the lender will receive what is owed at the time of your death.
Most lenders will roll the cost of credit life insurance into the loan. Review the loan documents to ensure that you are only paying for what you agreed to.
Credit life insurance is offered by many auto dealerships. You can also buy them from your bank or credit union.
Cost of credit insurance
An average credit insurance policy costs $0.5 for every $100 borrowed per year. If you buy a car for $30,000, the credit insurance policy will cost you around $150 per year. $150 per year may not sound like much until you consider the alternatives.
Term Life Insurance is a good alternative
Term life insurance is cheaper than credit life insurance. A 30-year old can get a $500,00 for about $15 per month. The cash will be paid to your beneficiary who could use it to not only pay off your loans but also your funeral expenses and other obligations.
Term life insurance is a much better option to help your family pay off obligations than credit life insurance.
To get term life insurance, you will need to take a physical exam in most cases. For credit life insurance, you do not need a physical exam.
If credit life insurance is not a good product, why does it still exist?
Some lenders require credit life insurance before lending money. That is especially the case if you can’ t put down a downpayment.
Also, some people are unable to qualify for term insurance for many reasons. For those folks, credit life insurance can be useful.
Bottom Line
Credit life insurance policies pay off your debt in the event of your death. It offers protection to the lender but you will bear the cost of the policy. The polices are expensive and cost $0.5 for every $100 borrowed. Most people are better off getting term life insurance, which is cheaper and pays cash to your beneficiary who can use it for any purpose.