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TheStreet Open House

Credit Life Insurance: You Don't Need It

First, credit life insurance is a type of insurance policy that banks will try to sell - and they will try hard to sell thanks to big commissions for these products - when a customer takes out a loan or opens a home equity loan. It's an add-on product, and some might even try to say that credit life insurance is required when you take out a mortgage with less than a 20 percent downpayment. Credit life insurance pays the lender if the borrower dies before having a chance to repay the loan in full.

There are off-shoots to this type of insurance product. Credit disability insurance pays the lender if disability makes it difficult for the borrower to live up to the obligations of the debt, and you might find products like credit unemployment insurance.

The premiums for a credit life insurance policy are rolled into the cost of the debt, so you hardly notice that you're paying for something separate. Your monthly payments for your home equity loan, car loan, or mortgage will include the credit life insurance premiums.

Is credit life insurance necessary? Not in almost every situation. Unless a family member's name is on the loan with yours, no survivor would be required to pay off the loan's remaining balance in the event of your death.

Credit life insurance isn't even a benefit for the consumer, it's a benefit for the lender. You're paying an extra fee for the lender's protection, not your own. Additionally, these plans often expire before the loan would be repaid in full. The reader indicated, as you will be able to see in the follow-up article, that her plan would have expired automatically when she became 66 years old. It actually expired several years prior. So, like term life insurance, you could pay into a plan for several years with a good chance of never needing to or being able to make a claim.

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