Introduction 

Credit Life insurance is gaining increasing popularity in India. For the loan providers, it offers protection in recovering the loan in case of the unfortunate death of the borrower. Also, it assists the family of the borrower by repaying the loan allowing them to retain the asset (e.g. house or car) without putting financial pressure on them during a time of bereavement. 

Credit life insurance is a type of life insurance policy designed to pay off a borrower's outstanding debts in case the borrower dies. The face value of a credit life insurance policy decreases proportionately with the outstanding loan amount as the loan is paid off over time until both reach zero value.

It pays a policyholder’s debts when the policyholder dies. Unlike term or universal life insurance, it doesn’t payout to the policyholder’s chosen beneficiaries. Instead, the policyholder’s creditors receive the value of a credit life insurance policy. 

What is the Cost of Credit Insurance in India?

The cost of a Credit Insurance policy depends on various factors such as the loan amount/ debt amount, type of credit and the type of policy.  Some of the methods to pay premiums in credit insurance are listed below.

  1. Single Payment method - The premium amount is calculated at the time of initiation of the policy and the borrower will be responsible for the entire payment at the time the policy is purchased.

  2. Monthly Outstanding Balance method - This is one of the most commonly used modes of payment with credit cards, home equity loans and other similar debts. There are two categories under this mode of payment. Two of the sub-categories are:

    1. Open-end accounts- The premium is charged monthly and is based on the monthly debt. The amount will be stated as a separate charge on the statement sent out by the lender.

    2. Closed-end accounts- The amount of debt does not vary and a fixed amount has to be paid every month. Failure to pay this amount will result in cancellation of the policy

How Does Credit Life Insurance Work?

Credit life insurance is typically sold by banks at a mortgage closing; it could also be offered when you take out a car loan or a line of credit. The idea is to protect your heirs if you die since the policy will pay off the loan. If your spouse or someone else is a co-signer on your mortgage, credit life insurance would protect them from making loan payments after your death. This could be appealing if you are the primary breadwinner in your family, and the loan co-signer would be unable to make payments in the event of your death.

But in most cases, any heirs who are not co-signers on your loans are not obligated to pay off your loans when you die; debts are not generally inherited. The exceptions are the few states that recognize community property, but even then, only a spouse could be liable for your debts, not your children. When banks loan money, part of their accepted risk is that the borrower could die before the loan is repaid. As such, credit life insurance protects the lender, not your heirs. The pay-out on a credit life insurance policy goes straight to the lender, not to your heirs.

Who Benefits from Credit Life Insurance?

Credit life insurance doesn’t directly benefit your spouse or heirs. Instead, the policies payout to your creditors. If you’re worried that you’re carrying an unmanageable debt burden, credit life insurance could set your mind at ease. That way you know your spouse won’t inherit that debt or face eviction from your family home.

You could just make your spouse the beneficiary with a regular life insurance policy. This would place responsibility on him or her to pay off the mortgage (and/or other debts) over time. But if your life insurance policy won’t cover enough of your debt, credit life insurance could help.

FAQs

  1. What is a Credit Life Insurance Cover?

Credit Insurance is a type of insurance policy that is used to pay off existing debts in cases such as death, disability and in some cases, unemployment. Credit insurance protects the policyholder from the lender from the borrower’s inability to repay the loan or debt due to various reasons. The insurance policy will pay the lender on behalf of the policyholder.

  1. Why do I need credit life insurance?

All credit providers are entitled to require you to maintain credit life insurance during the time of the credit agreement so that the credit obligations will be met should you pass away, become disabled, or retrenched and unable to pay the debt. It is designed to protect and provide a measure of security for both you and the credit provider.

  1. How will my claims be paid out?

In the event of a claim, the sum insured will be paid to the credit provider directly to settle your credit agreement obligation.

  1. What is the difference between Credit Property insurance and other types of credit insurance?

Unlike the other three credit insurance policies, credit property insurance is not directly related to an event affecting the borrower’s ability to repay the debt.

  1. Is credit insurance mandatory for a loan?

Credit insurance is optional. But it always advisable to avail credit insurance with a loan to stay protected against loan liabilities.

End Note

In most cases, credit life insurance allows your heirs to fare financially well in the event of your death and protects anyone who cosigned a loan, credit card or mortgage with you. It can be a handy tool, but other life insurance policies can achieve the same goals and more.