Credit life insurance is a necessity for anyone with dependents – whether this is a spouse, children or elderly parent that relies on your income for their daily living expenses.
If you are the sole or primary bread-winner in your household and have any outstanding debts or serious financial commitments, than you should have a life insurance policy. Simply put, life insurance will pay out a lump sum to your beneficiaries if you die or are diagnosed with a terminal illness. This lump sum of money will act as a replacement for the income that you bring in as well as cover any debts that you may have and funeral expenses. There are two main types of life insurance – the first is referred to as term life insurance and the second as whole-of-life-insurance.
Term life insurance pays your beneficiaries or estate a pre-determined lump sum in the event that you die within the period set out in the policy and, provided that your death is a result of an accident or a terminal illness. Once this period has expired your policy is canceled. This type of policy is generally cheaper and also has a range of additional benefits – from funeral expenses coverage to free financial advisory services. Whole-of-life insurance is more expensive that term-life insurance because, as the name suggests it will cover you for your entire life span and since a payout if guaranteed you’ll naturally have to pay more. Death as a result of natural causes will be covered as will death by terminal illness or accident. If you opt for this type of policy it is imperative that you keep up with the monthly premiums as failure to do so will automatically result in a cancellation of your policy.
There are a variety of options available when it comes to selecting a life insurance policy and credit life insurance is very different to both term life insurance and whole of life insurance. The main difference is that credit life insurance is generally viewed as risk mitigation for the lender. So if you take out a home or car loan, this insurance policy will ensure that the lender receives full repayment in the event that you die or are diagnosed with a terminal illness. In such a case the policy will repay the lender in full and the property will be transferred to your estate or next of kin. Credit life insurance will cover only one set loan at a time and will more than likely be offered to you by your lender. Your premiums will be calculated based on the loan amount and you are unlikely to have to undergo a medical examination to qualify – which is why credit life insurance will usually cost you more than term life insurance and will not provide your family with the same amount of coverage. This is why it’s generally a good idea to consider alternative life insurance policies before opting for credit life insurance. Some people are forced into taking credit life insurance as part of the package when applying for a home loan and many people that have chronic illnesses and circumstances that exclude them from qualifying for term life insurance have no other option that to accept this. You will also be required to take up credit life insurance if you’ve put less than 20% deposit on your home loan however, once you’ve made a certain amount of payments towards your home loan and have paid more than 20% you may want to ask the lender to cancel the credit life insurance. You will likely be required to prove that you have some form of insurance that will reduce risk to the lender however; regular term life insurance, mortgage insurance or income protection insurance should be able to satisfy them. Mortgage insurance is a good option for those that cannot afford life insurance or do not have any dependents as it will pay out a specific percentage of your usual income so that you can cover your mortgage payments in the event that you are unable to work. This can be anything from 40% of your monthly income to 50 – 160% of your monthly mortgage repayment. You can opt for more cover than your mortgage repayments because this additional money will make up for any possible variable rate increases for those who do not have a fixed-interest mortgage. If you do have a fixed-rate mortgage you may choose to opt for less cover in exchange for lower premiums. The length of time that you continue to receive compensation from your mortgage insurance will depend entirely on the type of policy that you have taken out and this is the reason that some lenders may not accept mortgage insurance as an alternative to credit or term life insurance. If you opt for a shorter benefit period – such as 6 months than your premiums will be lower than someone who has opted for a longer coverage period. It is important for you to be aware of the stand down period which is essentially a waiting period before the insurance company will begin to payout. If you opt for a longer stand down period this will lower you monthly premiums while opting for a shorter stand down period means that your premiums will increase accordingly.
Ensure that you speak with an independent insurance advisor such as one that isn’t tied to a single company as they will only be able to offer you the packages offered by their company. This will limit you greatly in your ability to find a policy that meets your specific needs. Any independent advisor or broker should be able to offer you more than one insurance option and should, at minimum have at least 3 available options. You should be aware that some independent advisors and brokers will charge you for their services while others will receive a commission from the insurance company that you end up taking up a policy with. Also remember to review more than one insurance offer – even if this means that you have to use more than one broker or advisor it may end up making all the difference in the world.
