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Definition: Credit Life Insurance
The insurance taken by the borrower to secure the lender. It is a function of the residual amount of loan. The premium decrease with the amount of loan which is withstanding. The term is often confused with the life insurance. But credit life insurance is a special type of life insurance. It is a loan liability plan. It is generally offered during car and home loans by the lender. The focus of the insurance is on assets rather than the person
Why would a borrower would go for such an insurance if he doesn’t have any incentive? Many a time it is a condition of the lender without which the loan won’t be offered. Secondly, in absence of credit life insurance the life insurance are either rejected or demands high premiums. The insurance protects the borrower’s dependents in case of his/her demise from the liability of the loan money withstanding. The insurance is expensive than the traditional because it covers higher risk. The premium of the insurance is directly proportional to the remaining loan amount. So, the premium amount decreases with each installment that is paid. A different version of this type of insurance is credit disability insurance. It pays payments to the lender if the borrower is sick or has developed some kind of disability.
Credit Life Insurance=Decreasing Term Insurance
Take example of credit cards. The credit life insurance is often necessary to get a credit card in many cases. As there are high chances of loan liability passing to the dependents in case of borrower’s death. It is logical and safe to offer it bundled with credit cards. This protects both the banks and the borrower’s from unseen risk of the lending going bad.