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In a world where credit limits are at an all time high, it is no wonder that people find themselves in constant debt to one creditor or another. In the last twenty years, whole industries such as credit counseling, debt consolidation, and debt reduction services have arisen or expanded to respond to the growing debt accumulated by the average person. The result is the possibility of creditors claiming against an estate when the debtor dies.
One way of battling this claim is to buy credit life insurance. This form of insurance allows a debtor to rest at ease knowing that in the event of his/her death, the insurance company will pay off the deceased’s remaining debt. How much debt is covered depends on the premiums paid to the insurance company. Like any insurance, the higher the debt, the higher the premiums. Read on to learn how credit life insurance works and whether it is for you.
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Insurance as an Option
The purpose of buying insurance is to avoid the possibility of a negative outcome due to an accident, a mistake, or the timely or untimely death of a policyholder. Car insurance allows a policyholder to avoid losing the value of a car should the car be involved in an accident that either partially damages or destroys the vehicle. The policyholder wishes to avoid the negative outcome of some possible future event by paying money (a premium) up front.
In financial circles, insurance is viewed as an option. An option is a right without an obligation to do something. At some specified time or event, the option holder has the option to either exercise or not exercise an option. In the case of car insurance, the policyholder has the right to exercise the insurance option at the time of an accident so that the insurance company essentially buys the policyholder out of the negative outcome (the damaged or destroyed car).
Credit life insurance operates just as any other insurance; it offers the policyholder the option to buy out of a negative outcome. When one passes away, accumulated debt is not suddenly forgiven and the creditor simply rights off the obligation as bad debt. Creditors have the right to claim the debt against the deceased’s estate before the estate passes to the beneficiary, usually the immediate family. If this were not the case, then older people would simply rack up huge amounts of debt knowing that the purchases would pass to the beneficiary without reprisal. Essentially, credit life insurance allows the policyholder to sell a negative outcome to the insurance company with the option to exercise the insurance policy at the time of death.
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Why Buy Credit Life Insurance?
Like an option, credit life insurance gives a deceased person the option to sell debt to an insurance company in the event of death. Because the policyholder paid premiums, he/she has the right without obligation to exercise this option. Typically, this exercising of the option is specified in a will and is executed by the policyholder’s attorney or the person holding power of attorney over the deceased’s estate if the deceased died intestate (without a will). Either way, the policyholder’s final wish to exercise the option is complete.
Regardless of one’s age, the premiums paid to credit life insurers ensure that debt covered by the policy will not pass to one’s estate. As such, the inheritance of the beneficiaries is not tainted by the debt claimed by creditors. When debt is claimed against an estate the result can be a long wait time before the estate is settled adding burden to the grief of the beneficiary. In the case of children beneficiaries, the debt holder may wish to unburden his/her children with his/her personal debt and is willing to pay the insurance premium to have peace of mind.
Credit Life Insurance can be a blessing for business owners whose business finances may get mixed up in the debt. In the event of a premature death, creditors can stake a claim against the business that might normally pass to the beneficiary. Estate law varies from state to state but the business form (sole proprietor, partnership, corporation, etc.) plays a role in how the creditor may stake a claim against the deceased’s estate. Sole proprietors whose business debt and personal debt are not considered separate are especially at risk. Again, these laws vary from state to state and country to country so it is wise to consult with a professional about how debt will be distributed at the time of the business owner’s death.
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Like any insurance, credit life insurance is a right without obligation to exercise an option in the event of death. Some people are bothered by the idea of burdening their children or beneficiary of their estate at the time of death. Credit life insurance works by removing the negative outcome of a beneficiary losing part of an estate to a creditor who has made a claim against the deceased’s remaining assets. This insurance can be particularly useful for entrepreneurs concerned about creditors claiming against the assets of the business.
Since most businesses carry some form of static or revolving debt that may or may not be viewed as different from the business owner’s personal debt, credit life insurance eliminates the possibility that all or part of the business will be lost to creditors who have a legitimate claim to collect a debt from the resulting estate.