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UPDATED: Jul 25, 2017
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When you buy a car through a dealer, you typically walk on the lot with every intention of keeping you payment under a certain fixed amount.
Unfortunately, by the time you make it past the car salesman and into the finance office, the payment that you agreed on is inflated to include warranties and other add-ons that help you when times get tough.
One popular add-on that you’re offered as you sign the paperwork and you discuss the possibilities is credit life insurance. Believe it or not, it’s not the salesman that pushes the product but instead the finance specialist.
While credit life does make sense in some cases, it doesn’t always.
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Why do lenders sell credit life insurance policies?
A bank isn’t an insurance company, so it might be confusing to hear that the lender is offering you an insurance product that’ll be financed into the loan.
You might think it’s a product that benefits you, and that’s how it’s marketed, but really the product is life insurance for the borrower that benefits the lender by guaranteeing the loan is paid even if the borrower passes away.
How is credit life insurance sold to borrowers?
You’re offered the option to buy life insurance to pay off your loan when you’re financing a vehicle through a dealer or when you’re financing a private party sale through your credit union or bank.
Before you have coverage, you’ll have to submit an application.
Much like a standard policy, it must be underwritten before it’s approved.
Which factors might make you ineligible for credit life?
With some forms of specialty life insurance, your medical history, and your age aren’t taken into consideration.
Surprisingly, carriers offering credit life coverage to you for 4, 5, or even 6 years will take some of the standard underwriting factors into consideration.
Here are the common underwriting criteria:
- Borrowers who turn 70 during their loan term won’t have coverage
- Borrowers 65 and older won’t be approved for a new application
- The policy won’t cover death if it is the result of a pre-existing medical condition
- Some policies won’t protect you if you work more than 30 hours per week because of the risk
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Can a lender add credit life to your loan without letting you know?
If you look over your loan and you see that credit life has been added to your policy without you knowing, it’s important to file a complaint with your state insurance commissioner.
You are never required to carry credit life and sometimes it’s your responsibility to remove it when it’s added into the contract without you knowing.
How much does credit life cost?
It’s easy to assume that you’ll get a good deal for credit life on your auto loan since you’re buying a car and an insurance product.
Some consumers have found that the coverage was as much as $3600 financed into the entire loan term.
If you decide to pay a single premium instead of a monthly premium, it does keep the premium lower.
What factors are used to determine credit life cost?
A number of different factors are used to calculate risk and how much a borrower should pay for the coverage.
If you are deemed a high-risk, the cost for coverage can really inflate your payments quickly.
Here are a few of the common rate calculation factors:
- The amount of the loan or the outstanding amount of debt
- The type of credit
- The type of credit insurance
- Your age at the inception of the loan
- Loan term
How is a claim paid out if you die?
If you have a traditional life insurance policy, you’ll name beneficiaries and how you want your benefits to be disbursed to them when they file a death claim.
It doesn’t work like this with credit life coverage.
When you file a credit insurance death claim, you don’t have a beneficiary.
Instead, the beneficiary is automatically the lender.
After a claim is processed, the lender will receive the proceeds and the balance of the loan will then become $0.
There’s nothing left over because the policy only pays the loan balance and nothing more.
Why Many Say You Should Avoid Credit Life
Finance reps through banks and dealerships make a commission on the sale of credit life, credit disability and warranty products that are sold in the finance office.
While there’s a huge focus placed on the fear factor, you should think twice before you elect to pay more on a loan to pay off your loan upon your death.
Here are some drawbacks:
- The premium for credit life is higher than premiums for traditional life
- If you’re an older borrower, coverage will cancel before your loan is paid off
- The benefit you’re paying for goes down as you pay down the balance of your loan
- Pre-existing medical conditions can limit what types of claims are covered
- You can’t select beneficiaries who receive the benefit
- When you pass away, your executor and heirs aren’t obligated to pay off your loan
See If There Are Options to Add Coverage to Your Auto Policy
If you’re worried more about a benefit being paid to your family, it’s possible to add life insurance coverage onto your car insurance policy.
Many carriers offer death and dismemberment coverage that helps to pay for final expenses when a loved one is killed in a coverage vehicular accident.
The cost for this coverage is minimal and there aren’t restrictions.
If you want to see how much it costs to add specialized life coverage to your auto policy, you should contact your carrier to see if the coverage is available.
Once you know the cost, use an online car insurance quote comparison tool to see if you can save money switching to a new provider. If you find a lower price, make the change and get more coverage.
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