One of the dealer adds that you may be offered when you qualify for a bad credit car loan is credit life insurance.
Credit Life Insurance
Here at AutoNet Financial, we have recently received a number of questions regarding credit life insurance. Because of this, it seems like now might be a good time to try and explain just what this product is.
Credit life insurance is basically a form of term life insurance. Term insurance refers to what is essentially a life insurance policy that is in force for a fixed period of time and, once this fixed period has expired, it cannot be renewed. It is also a form of life insurance that builds no cash value, so once the policy is finished, you cannot get back any of the money you spent on it.
In addition to being a term type of life insurance policy, credit life insurance is also a decreasing term policy. The name “decreasing” alludes to the fact that the policy is designed to cover the current amount due on the loan at any given time. This means that as the loan is paid off, the dollar amount of the credit life policy decreases to match the decreasing amount of the loan balance. When the policy is initiated, it covers the initial loan balance. When the loan is paid off, the amount of life insurance coverage is zero and the policy is cancelled.
How credit life premiums are paid
When you buy credit life insurance from the dealer as part of your car loan, the amount of the insurance is added to the finance contract and the monthly premium is added to the cost of your monthly car payment. Because the cost of the premium is part of the finance contract, you are paying interest on the insurance premium as well as interest on your loan payment.
The positives and negatives of credit life insurance
There is no right decision or wrong decision when it comes to credit life insurance. Here are the facts:
The positives:
1. Credit life insurance offers you peace of mind – it will pay off your car if you should die before the contract is paid off and your family (or your estate) won’t be responsible for the debt.
2. The payment is added in and becomes part of your car payment, so there is no separate bill to pay each month.
3. There are health and age restrictions in order to qualify for a policy but they are usually not as restrictive as with traditional whole life insurance policies.
The negatives:
1. As a rule, credit life insurance is more expensive than regular term life insurance.
2. In addition to paying the insurance premium, you are also paying interest on the insurance premium because it is part of the car loan.
3. If you are single and the loan is only in your name, your family would have no liability.
The Bottom Line
Whether or not you choose to add credit life insurance to your car loan is a decision that you will have to make. If you have a family and are worried that they might not be able to make payments on your car if you should pass away, you might want to check out the costs of term life insurance before you sign on the dotted line for credit life insurance.
For more information on car buying and bad credit car loans, visit our web site at www.autonetfinancial.com. Remember, our job is to put you “on the road” to better credit.
