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Life insurance for a borrower
If you are new to credit life insurance, you can easily confuse it with standard life insurance. However, consumers need to understand that credit life insurance to pay off the balance of a death loan is not life insurance, says Kevin Lynch, assistant professor of insurance at American College Bryn Mawr. Pa.
It can be a little confusing, ”says Lynch. Even though they are two different products, they often get very similar results. Of course, it doesn't help that the names are similar. But here are five things you should know about credit life insurance.
Loan term for car and home loans
Simply put, credit life insurance is an insurance policy that the borrower has taken out in favor of the lender. In a typical policy, the borrower pays a premium, which is often included in his monthly loan payment. This allows the lender to pay in full if the borrower dies before the loan is canceled. The title of the underlying asset is freely and clearly transferred to the inheritance of the borrower and, ultimately, to the beneficiaries of this inheritance. According to Lynch, the lender usually offers car loans and home loans at the time of purchase.
In addition to the confusion, the life-credit score is also an advertising and marketing slogan used by popular life coverage rules wherein agents endorse that normal life coverage is a manner of paying off the mortgage. According to Tim Gaspar, CEO of Gaspar Insurance in Encino, California, this slogan, which is not related to the type of policy, generally means that the consumer pays more in the end. "If you are in the life insurance market and you hear that term, you should look elsewhere," says Gaspar.
The term of the loan is more expensive
Although the price of a policy depends on the loan amount, credit life insurance policies can cost more than traditional life insurance policies.
Overall, it is a touch bit extra with credit score life insurance because the product is riskier and generates higher premiums.
This increased risk comes into play because credit life insurance is called a guaranteed issue product, which means that eligibility depends only on the status of your borrower. Unlike most life insurance policies, the applicant is not asked to undergo a medical examination or disclose health information because the loan balance and not the life of the borrower is insured, said Lynch.
Should you buy a life full of loans?
If credit life is more expensive than normal life and should benefit the lender, why would anyone buy it?
It's a good question, says Robert Hampton, an accountant from Fort Worth, Texas, who calls credit life insurance "a stupid gamble."
You pay for coverage that decreases with debt repayment so that you pay much less and much less safety each month, says Hampton.
If it is now not insurable (that is, you cannot purchase life coverage through everyday channels), it'd be an option. Living on credit doesn't require a clinical exam.
Some lenders require a loan term
In some cases, a lender may require a borrower to purchase life and credit insurance. According to Lynch, this is generally the case for home loans, but only in cases where the buyer has no down payment of 20% of the cost of the house. In this case, at the insistence of the lender, you may have to buy life insurance to get the loan.
But there is a positive side. Over time, a borrower increases its original position. If it exceeds the 20% threshold, the borrower can ask the lender to cancel the policy. Lynch says it's a good idea to find adequate life insurance so that your loved ones can pay the mortgage if something happens to you.
Loan term avoids tax problems
With standard life insurance policies, insurance exclusions can be very broad and very different from state to state.