What Is Credit Life Insurance? Should I Have It?

When comparing home loans, you may come across credit life insurance as part of your loan estimate. Learn what credit life insurance is — and ways you can ensure your loved ones are protected from any large financial burden when you die.

What happens to my mortgage when I die?

Throughout your life, you are likely to accrue debt by taking out loans to make large purchases. It’s good practice to pay off all debts as soon as you are able, but if you still have a mortgage when you die, what happens next depends on whose names are on the loan and the state you live in.

• If you have a co-borrower or co-signer, they are responsible for paying the loan balance.
• In community property states, your spouse may be responsible for the outstanding debt.
• If you are the sole borrower, the lender will take possession of your home — unless your family pays the loan balance.

Your home is one of your biggest investments, and you’ll want to make sure the equity you’ve built in your home stays in the family. An insurance policy is one way to help your family pay off your mortgage without a large financial burden.

What is credit life insurance?

Credit life insurance is a specialized life insurance policy designed to pay off large loans, such as a mortgage, if the policyholder dies. You buy credit life insurance through your lender, and payouts of the insurance policy are made directly to the lender.

An important difference between credit life insurance and life insurance is that:

• Credit life insurance is paid out directly to the lender.
• Life insurance is paid out to your beneficiaries, giving your family flexibility in how they use the payout to handle your affairs.

If you have existing life insurance coverage, it may be enough for your beneficiaries to cover the balance of your home loan — without additional credit life insurance. It’s a good idea to review your life insurance coverage periodically to make sure it’s adequate for your current level of debt.

You should compare the costs of both options before moving forward, as premiums may vary and can impact the total amount you owe on your loan. With a better understanding of the full costs, you can make a more informed decision.

What if credit life insurance is included in my loan estimate?

Credit life insurance is not a requirement when you take out a home loan, and you can ask your lender to remove this optional insurance.

Some lenders will include the cost of credit life insurance into your loan principal, which means that you would pay interest on the combined amount. This adds up over time, and getting life insurance — instead of credit life insurance — may be a more cost-effective option to safeguard your finances for your family.

Make sure you review loan estimates carefully and understand all of the costs and how they affect your total loan amount. If you don’t understand, ask your lender questions or consider reaching out to a housing counselor for guidance.