To avoid any confusion, we are not talking about credit card insurance but rather credit life insurance. Still, you are probably thinking what is credit life insurance? In a nutshell, it is a type of insurance often bought with cars and homes in which the insured pays a premium & in return the loan is repaid in full in the event of death. This means that if you purchase a home with a $500,000 mortgage & enroll in credit life insurance then you will be paying premiums in case you pass away to ensure the debt is fully repaid. At first glance, it may seem like a nice option, but in reality it is very costly. Moreover, in almost all circumstances a term life insurance policy is a better option than credit life insurance.

Insurance Companies Benefit
As you might expect, it is an extremely profitable product for the insurance companies as the loss ratios are in the 20 to 30% range whereas term life insurance is usually in the 70 to 90% range. This means that the insurance companies pay out $0.20 to $0.30 for every $1 they make in credit life insurance premiums. Not a bad business for them.

Know the Insurance Terms
Another problem is that salespeople (i.e. car dealers) are selling the product & they usually don’t know anything about insurance or the financial position of their customers – they’re just looking to increase their commission. Please also keep in mind that salespeople may say the credit life insurance policy is a nice way to protect your family if you should die as the family members wouldn’t be responsible for the debt. But, that is only the case if they are also listed as debtors or guarantors.

When Credit Life Insurance May Start to Make Sense

It may start to make sense if ALL of these conditions apply:
* Have a family
* Incurred sizable consumer debt through a purchase
* Coverage of the debt was outside the scope of the term life insurance you currently have or can purchase
* Spouse and/or children are also listed on the account as debtors
* Concerned that family wouldn’t know how to manage the insurance proceeds if you had term life insurance

As you might expect, this situation doesn’t come up too often. But, if it does, then it may start to make sense to think about credit life insurance.

Do I or My Family Owe Taxes if I Have Credit Life Insurance?
Since the proceeds of the insurance policy go directly towards paying off the debt & the insurance provider is essentially the beneficiary of the policy, & not the family members, there wouldn’t be any implications to estate or inheritance tax.

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