Credit Life Insurance

What is Credit Life Insurance?

Credit Life Insurance is a variant of a term insurance plan that pays off the outstanding loan if the borrower passes away during the loan tenure. It helps clear liabilities, such as a home loan, allowing your family to use other life insurance payouts or investments for their own financial needs rather than repaying the debt. You can buy credit life insurance at the time of loan sanction, when banks usually offer it, or purchase it separately through an insurer or an online insurance platform. It settles the outstanding loan amount in the event of an unforeseen circumstance, ensuring your family's financial security.

How Credit Life Insurance Works?

Credit life insurance is offered by lenders when an individual borrows a large amount of loan. Your insurance company will pay the remaining balance to the lender in case of your death during the loan period, and will ease the financial burden on the family.

This becomes important when you have a co-borrower or dependent who depends on the asset purchased with the loan, such as a house. Credit life insurance during a home loan will ensure that the co-borrowers are not left with the burden of repaying the EMIs or losing the house in the event of the borrower's death.

Usually, personal debts are not automatically transferred to other family members unless they are co-borrowers, sureties, or joint owners of the loan or asset. Credit life insurance reduces lenders' risk and ensures that these families can retain the asset without financial burdens.

What are the Benefits of Credit Life Insurance?

• Less stringent health requirements
  Credit life insurance requires less stringent health requirments and is sometimes issued on a guaranteed or near-guaranteed basis. In fact, it may not require a health exam at all.

• Easier access at an older age
  While term insurance policies increase significantly in cost with age and require a medical exam, credit life insurance may be more accessible at an older age because it is based on the loan, not a health evaluation.

• Voluntary Nature
  Credit life insurance is always voluntary. Lenders are legally prohibited from making credit life insurance mandatory or influencing lending decisions based on your acceptance.

Who is the Beneficiary of a Credit Life Insurance Policy?

The lender is usually the beneficiary of a credit life insurance policy. That means the money from the claim is used to pay off the loan.

How to Buy Credit Life Insurance: Online vs Offline

Buying credit life insurance is simple and can be done online or offline:

Online:

You can buy a credit life insurance policy directly from the website of an insurance company. You can also use aggregators to buy and compare rates, terms, and policies. Usually, the process is quick, all online, and easy to understand. Select the coverage type, and then enter Loan Details. Pay the single premium online. Online plans are exempt from GST, which makes them more affordable in the long run.

Offline:

You can usually get offline credit life insurance through banks when you take out a loan or through insurance agents. Most offline plans are single-premium products, and the cost is often added to your EMIs. The GST is 18%, and the premium is not as flexible.

Premium Comparison: Online vs Offline

Factors to Assess Before Purchasing Credit Life Insurance

• Assess your existing life insurance
  If your existing term or life insurance policy is able to cover loan payments and your family’s daily expenses are already covered by investment income or other earnings, then credit life insurance may not provide much additional benefit. Having a standard life insurance payout also gives your family flexibility on how to use the funds.

• Understand who really needs to be protected
  Credit life insurance makes sense when there is another party, such as a co-borrower, guarantor, or dependent, who would have to pay off the loan or lose the asset if the borrower dies. If there isn't another party that has to service the loan, the need for this insurance is likely to be lower.

• Compare the cost with other options
  For the same loan amount, credit life insurance often costs more than a pure term plan. In some cases, the premium is added to the loan amount, which means you also end up paying interest on the insurance premium over the loan tenure.

• Read the policy terms carefully
  Check for waiting periods, exclusions, cancellation terms, and refund rules. Also note that credit life insurance is not mandatory by law. A lender cannot force you to buy it as a condition for approving a loan.

Who Should Buy Credit Life Insurance?

• Anyone who already has a loan
  If you've taken out a loan and don't want your family or co-signers to have to make payments or lose the asset if something bad happens to you, you might want to think about getting credit life insurance.

• People who take out home loans
  Credit life insurance makes sure that your dependents get the house and don't have to worry about paying the EMIs and selling the house as well.

• Loan for a car or bike
  It's always better to stress the importance of credit insurance than to stress the importance of credit life insurance. People who are borrowing money to buy a car or a bike It makes sure the car doesn't go back because the loan is paid off, so your family gets to keep the car.

• People who take out personal loans
  Credit life insurance helps co-borrowers or guarantors avoid having to repay unsecured personal loans.

• People who take out student loans
  Parents are often co-applicants for education loans. Credit life insurance protects them from having to repay the loan if something happens to the borrower.

• People who borrow loans for business

It helps the business stay open by paying off debts and easing the financial burden on partners, co-founders, or family members.

What is the Best Credit Life Insurance in India?

Let us take a look at the best home loan insurance plans available in India

Disclaimer: +₹360/month is the starting price for a ₹99 lakhs loan cover with an 8% interest rate for an 18-year-old male, non-smoker, with no pre-existing diseases, loan tenure up to 20 years, rounded off to the nearest 10.

What Are Alternatives to Credit Life Insurance?

If you do not want to use credit life insurance, there are several alternative options that can be just as effective.

• Term Life Insurance
  This is the most popular alternative to credit life insurance. This type of insurance provides greater coverage for a lower premium. The insurance money can be used to pay off the loan and help cover other expenses.

• Mortgage Protection Insurance
  This is a type of insurance that is specifically designed to pay off a home loan. The coverage amount will decrease as the loan balance is paid off.

• Emergency Savings or Investments
  Having an emergency savings account or investments will allow you to pay off the loan when you are experiencing financial difficulties.

• Whole Life Insurance
  This type of insurance will provide coverage for the entire life of the policyholder. This insurance can be used to pay off debts, but it is more expensive than term life insurance.

• Employer-Provided Life Insurance
  Group life insurance provided by an employer can be a temporary alternative to credit life insurance, especially for salaried employees.

Wrapping It Up!

Credit life insurance is a simple way to protect yourself while you pay off your loan. If the borrower dies before the loan is paid off, the debt is forgiven, so family members or a co-signer don't have to deal with it. It is often included with home loans, personal loans, car loans, and credit lines, especially when the borrower and the lender are both responsible for paying back the money.

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