What exactly is credit insurance: A type of insurance bought to cover an outstanding debt in the event of your death or disability.
Financial institutions pitch this insurance as a way for you to cover your debts and protect your family. Creditor insurance really protects your lender. If a bank provides a loan that is not secured by an asset such as a house or a car, they want to ensure that they will receive their money back. You are then charged a monthly fee as a way to insure themselves against their own risk, which is you!
When you obtain a loan you typically pay a portion of principal and interest each month. When you purchase credit insurance it’s an extra expense, which means it will take longer to pay off your loan. In many cases the credit insurance is never utilized and therefore provided you with no benefit.
If you have credit insurance the bank gets the money when you die, not your beneficiaries.
Making sure that you cover your debts when you pass away makes sense. However, there are other options available. One answer is personally owned life insurance.
Having personally owned life insurance as opposed to credit insurance has many benefits:
First off, once you pass away the money goes directly to your named beneficiary(ies). This means your beneficiary can utilize the money as they see fit. The bank can’t go after your beneficiaries for unsecured debts.
Credit insurance is underwritten at death. This means that they are incentivized to find a reason to deny the claim.
This is called post-claim underwriting. This is the practice that involves little or no underwriting (minimal health questions) when the policy is issued and then after the insured dies, they go back and do a more thorough evaluation. During this process, the underwriters can determine that the insured did not actually qualify for the insurance in the first place and thus deny the claim. With post-claim underwriting you do not know if you qualify until after you die, and then it is too late to go back and seek other coverage.
Personally owned life insurance on the other hand is underwritten at the time of application. This can offer comfort knowing that you will get what you pay for when it comes time to claim the coverage.
Depending on certain factors like your age, current health, and your credit history the premiums on credit insurance are typically higher than on life insurance. Also, credit insurance premiums are usually only quoted for a year and then the price can increase.
If you change who you are borrowing money from, your credit insurance policy is terminated. You will have to reapply with the new financial institution to obtain coverage. With life insurance, it stays with you wherever you move to as it is attached to you, and not to your debt.
Life insurance is much more flexible. If you pay down the loans that you are trying to get insurance for then the beneficiary can choose what to use the money for a new home, car or education. With credit insurance, the benefit can only be used to pay off that specific debt.