The whole reason we buy life insurance is to provide peace of mind. In the event of an unexpected event you are providing financial relief to your loved ones which can help with financial burdens.

If you are getting any form of financing like a mortgage, car loan, line of credit or another type of loan, the financing group will most likely offer you creditor insurance. Creditor insurance is any insurance which is offered through your creditor. Banks are the most likely source, but also, credit card companies and financing companies which are owned by other larger corporations as well. For example, many automotive groups have their own financing departments. The type of financing defines what the creditor insurance is called. It may be referred to as mortgage insurance or loan insurance. Whatever the case, the creditor offers this insurance to pay off the balance of your loan or mortgage in the event of an accident, illness or a loss of life.

With all that in mind, we can see the goal of creditor insurance and life insurance is pretty much the same. There are however some key differences that should be considered before you make a decision on either one.

Cost

The price you pay on premiums for any form of life or health insurance is determined by two main factors. Your age is the primary factor and the premiums will be higher in every case for each year aged. The second main factor is your health. Any health condition you have may have an effect on the premium. As well, health choices like smoking and heavy alcohol consumption will also raise premiums.

Depending on the creditor, your age and your health may or may not have an effect on the premiums, they will be significantly higher in either case. As well, the quoted premium may only be valid for one year. Many creditors will use a generic table for premiums to save time. Often, they will take an average premium rating based on their most typical demographic of clientele. For example, a creditor insurance premium for auto financing may be based on the cost of insurance for a middle-aged non-smoking male. This might be beneficial for anyone older than 35 or for anyone who is a smoker, but what about the rest? As well, they typically use a higher rate scale for their premiums, so a 35 year old male non-smoker might find cheaper insurance with an actual insurance company anyway.

With a term life insurance policy, you will likely pay less money over a longer period of time for the same or better coverage. What’s more, is that your life insurance premiums remain the same for the length of your term. So lets say you go buy a new $70,000 truck and get it financed over 8 years. The average cost of creditor insurance for this 8 year term would cost around $2500. To recap, that’s $2500 over 8 years for $70,000 of life insurance. Bear in mind that you’ll continue to pay the same price for that insurance with each payment despite the fact that you’re gradually paying down the truck (Diminishing the value of the creditors insurance policy on your life).

Now obviously, each insurance company has a different way to calculate premiums, but certainly their rates are more competitive than this. Let’s compare below.

The premiums in this table are based on the life of a 35 year old non-smoking male.

As you can see there is only one Insurance company with a comparable cost of premium to the Creditor Insurance company is from a company which offers Guaranteed Issue policies. This means that the policy will be issued to the applicant regardless of most medical conditions. The two premiums are similar because for the most part, the Creditor Insurance company is operating on this same premise. They’re offering a policy without considering medical conditions of the individual. This is why the premium is so high.

When comparing the premiums from Insurance Companies A, B, C and D, we can see that the premiums are significantly lower in all four cases. Insurance Company A & D are both offering the same face value of $70,000 (to cover the cost of the $70,000 truck) and they both work out to a lower premium overall. Notice also, that despite having a higher face value, Company’s B & C have lower premiums for all payment frequencies other than the overall premium for Company C.  We were only able to provide these face values here because these two companies will not offer a term 10 insurance policy for anything less than those amounts.

Bear in mind also, that the terms for all insurance companies are for 10 years. You would be insured for the full amount for an extra two years longer than the creditor insurance and still pay less. If you don’t want the full 10 years, you simply cancel the policy with no further obligation.

After comparing these policies it’s plain to see that you’d save money instantly and overall by opting for Life Insurance instead of creditor insurance.

Beneficiaries

Creditor insurance only protects the creditor. This means you do not choose the beneficiary of the policy. The beneficiary is the creditor. So in the event of loss of life, the creditor receives the benefits from this policy instead of your family. It is also important to consider that this benefit will not be for the full face value of the loan, but rather the outstanding principle amount. Despite paying for insurance on the full value of the loan, it only covers what is left owing.

With life insurance, you choose your beneficiaries and the money from the claim benefit goes to them. This is also creditor protected. One important thing to remember about your estate after you pass, is that creditors can make a claim on the assets there within based on any debts you may still have at the time of your passing. The one thing on which they cannot lay claim is the benefit payout from a life insurance policy which has a named beneficiary. This is why naming a beneficiary is always recommended. Some people simply name the estate, but this would not be ideal if the estate is in arears.

Eligibility

When applying for Creditor Insurance most customers will qualify for coverage after answering just a few basic health questions or in some cases, none at all. This is because creditor insurance policies use “post-claim” underwriting. This means underwriting will only take place after a claim is made. The insurer will look more closely at your medical history and if any previous health conditions are found your claim could very well be denied. This would be the case whether the conditions were existing at the time of the policy purchase or after. So even though you paid your premiums, you may not be covered after all. The insurer may be gracious enough to return the premiums paid to your beneficiary though.

To qualify for life insurance, you may need to provide a blood or urine sample upfront. This might only be the case on larger policies of $500,000 or over. For a $70,000 you would likely only need to complete a medical questionnaire. As well, the insurance company may look into your medical history, but here again, for such a small face value they may overlook minor things. The important thing here is that underwriting is done when the policy issued. So once you have it you won’t have to worry. If your loved ones need to make a claim, they should receive full benefits with no further investigation required.

Convenience

Creditor insurance is usually arranged at the time of signing for your mortgage or loan papers and done so very quickly. The premiums are simply added to your mortgage or loan payments. Think of it as the quickie mart of the financial world.

Life insurance is a longer, more involved process and the payments are separate from the loan. Often, qualifying for the Life Insurance and going through underwriting can take up to a few months. However, and once again with small policies of less than $500,000, the process would likely only take a week or two and while the policy is being written most people could qualify for temporary insurance.

You Do the Math

In the end, you’ll likely find that a term life policy has larger benefits for less money. If you can qualify for a simple term policy to cover off the amount of your loan for the term of your loan, you’re always better off. As well, even if you can’t qualify for a simple term policy, be sure to shop around. A guaranteed issue policy may be the answer for you. It might not be much cheaper, but the benefits will always outweigh those of the creditor insurance from your lender.