Credit Life Insurance Can Be A Bad Deal

28 Dec Credit Life Insurance Can Be A Bad Deal

Congratulations, you just bought a home, would you like to buy credit life insurance? Most new homeowners, car buyers, or borrowers like the idea that their debt will be paid when they die. But is it a good deal? In most cases, the answer is no.

What is credit life insurance? This is an insurance policy sold by or through the lender that pays the debt off when you die. The premium is a level payment that is added to your payment every month. No pain of writing a separate check and your lender will get paid automatically when the big event happens, right?

But consider this; when you pay on a debt like a mortgage or car loan regularly the balance goes down a little every month. That’s the point. Eventually the loan gets paid off. But the amount you pay every month for that insurance does not go down. So the benefit you are paying for goes away as time goes on.

In contrast, a term life insurance policy has a level benefit amount. The cost of some term policies do go up over time, but not dramatically. Life insurance policies with an accumulated cash value have the added benefit of a forced savings within them. While they may be a bit more expensive, the monthly cost does not vary as long as the policy payments are current and at some point the policy is paid off, meaning no monthly payments.

Consider the following graphs:

Credit Life Insurance is level cost, but declining coverage

Term Life Insurance can be level cost and the coverage remains level

This housing company demonstrates how much money can be wasted by buying Credit Life Insurance. For other examples of insurance you don’t need to buy, see Consumer Reports’ 10 insurance policies you don’t need.

“ConnecticutGene Melchionne is a bankruptcy lawyer covering the entire State of Connecticut. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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