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Life Insurance and Debt – How Does It Work?

Published On Apr 27, 2021 12:00 AM By InsuranceDekho

Life insurance with debt is also known as credit life insurance. It is a type of life insurance policy that has been designed to pay the insurer’s outstanding debts, in the event of the death of the insurer. The face value of the credit life insurance policy decreases with time, as the outstanding loan amount is being paid off until both of them have zero value. 

How Does the Life Insurance Policy with Debt Work?

Credit life insurance is generally sold at banks when they are closing a mortgage and can also be offered while taking a home loan or car loan. The ultimate aim of this type of insurance is to give financial cover for the dependents of the policyholder in case they die before paying the debt.

These insurance schemes also protect the co-signer in the mortgage from making loan payments after the death of the principal borrower. The value of the credit life insurance decreases throughout the policy, as it will be covering only the outstanding balances of the loan.

These insurances can be used to pay for a variety of loans such as student loans, vehicle loans, home loans, mortgages, etc. These credit life policies do not have stringent underwriting requirements and have the following advantages.

1. Protects a Co-signer or Joint Borrower

At instances when a loan is being bought jointly by two people, the credit life insurance works by protecting the joint borrower from debt, upon the death of the principal borrower. When the principal borrower dies, the value of the policy will be paid to the joint borrower, without any tax. They can use the proceeds to pay off the debt. 

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2. Can Be Approved Without Medical Examination

There are the greatest advantages of debt life insurance. It requires no medical examination or less stringent health screening for approval. This is also referred to as guaranteed issue life insurance for the same reason. Thus, these are far better than term insurance, where the policy premiums are fixed based on the health and age of the applicant.

3. Offers Tremendous Peace of Mind

Credit life insurance can be an exceptional option if, for any reason, the person is not able to get a general insurance policy through normal channels. People who have been denied life insurance owing to health reasons, can go for credit life insurance and need not worry about how debts will be paid in case of unexpected eventualities. 

4. Different Types of Debt Life Insurance

Many different types of credit life insurance help in protecting the assets against risks apart from death. There are credit disability life insurance and unemployment life insurance that protects the insured from debts secondary to disability and unemployment. There is also credit property insurance, that helps the insured to pay off debts on property that has been destroyed due to natural calamities.

Also Read:- Term Vs. Whole Life Insurance: Which is Right for Me?

Bottom Line

Thus, the debt life insurance is very useful while taking a loan from banks, such as a car loan or home equity loan. The premiums of this policy will be clubbed with the monthly loan payments. This is an absolute necessity for all loan seekers as it gives them a complete peace of mind over future financial hardships.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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