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Credit Life Insurance

Credit life insurance is one of the most popular additions to any financial services contract. Credit life insurance can be sold on a variety of products, from home mortgages, to credit card debts, and even on car, boat and personal loans. But what most people don't realize is that these policies are most often unnecessary, and expensive.

How Credit Life Insurance Works
Credit life insurance is sold to a debtor to cover remaining debts should the borrower die before the balance is paid in full. There is a very distinct difference between credit life and regular life insurance in that credit life insurance is made out to your lenders upon your death. Life insurance, however, is generally made out to surviving family members.

For all the risks involved, credit life is a very expensive form of life insurance. Even on a very small car loan, the premium may work out to be as high as one thousand dollars per year, even though the risk of death is not nearly that high. Why such high premiums? Because credit life insurance is one of the most profitable forms of insurance that can be sold.

And since they're highly profitable for a lender, they're frequently touted by sales staff as a way to protect your family from inheriting your debt. That's a great reason to own insurance, but ordinarily, your family cannot and will not inherit your debt after you die. Instead the debt vanishes, and no one if left liable for the bill.

Inheriting Debt

Consumer debts aren't very easily passed on to the next generation. While you may hear plenty of puffery from a sales rep indicating otherwise, debts are not passed on unless another family member has also signed onto the contract. Signing on includes either co-signing or being a member of the party who has signed the contract. A husband and wife's signature on a mortgage, for example, would mean both are liable for the debt regardless of the death of one of the signors.

In most cases, contracts for consumer debt have only one signor. These debts will end at the time of death, and no one is required to make good on them, especially not the children of the borrower.

What to Buy Instead
If you wish to have insurance capable of paying off your debts, then regular life insurance will probably best foot the bill. For the price of a small credit life insurance policy, one that lasts only for the length of the loan term, a considerably larger life insurance policy can be purchased. Plus, since this is a regular policy, your family will be the beneficiaries to the policy, and will receive the cash at the time of death, not your lender.

One other reason for purchasing regular life insurance is that credit life insurance is extremely limited insurance. Credit life insurance does not protect you past the age of 70 and will not pay out if you happen to die from a pre-existing condition. Thus, a borrower with a spotty health history who received a loan with the help of a family consignor would still pass on the debt if he or she were to die from an illness existing at the time of signing. This alone is one of the many reasons credit life is so profitable, it rarely pays out!

This insurance is only going to get more popular as more consumers turn to banks for loans and banks, still feeling the complications of the financial crisis, are going to turn to credit life insurance as a high profit product. Remember: there are no laws that require you to have credit life insurance, and salespeople who say otherwise may be breaking the law.

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