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What is Credit Life Insurance on a Car?

Credit life insurance on a car can be confusing. Deciding if you need it or if you can skip it can be a weighty decision. The topic itself is often overlooked when finance experts speak about hot button credit issues, but they really shouldn’t. In that light, here are a few pros and cons of credit life insurance on a car.

Credit Life Insurance: What is it?

Credit life insurance is a form of term life insurance. Term life is a policy that is in force for a fixed period of time only. Additionally, the policy never builds any cash value. To make matters even worse, it is a ”decreasing value” policy. Since it is meant to only cover the value of the loan, the value of the policy decreases after each payment is made. Basically, in case something happens to you, the owner, the policy pays off the remainder of the loan, ensuring your family is not saddled with a monthly payment for a vehicle they do not need or use.


  • Peace of mind: the car will be paid off should you die, protecting your family.
  • Payment is rolled into the loan: no worrying about another payment.


  • Premiums are quite expensive in relation to the value of the policy. A few states regulate the cost of these premiums, but still allow them to be set astronomically high.
  • The payment is rolled into the loan principal. While that does allow you to avoid having an additional payment each month, it does force you to pay interest on the premium. This is going to cause your monthly payments to be significantly higher than they should be.

Many lenders and dealerships try to sell these policies to people who do not need them. These policies only make sense for individuals who are over 55 or have dependents to worry about. Even if you have dependents, but are under the age of 30, you probably do not need a credit life policy on a car. Additionally, unless a person is a named on the loan, they will not be personally liable for the loan balance.

Even if you think you should carry credit life insurance on a car, these policies also have some restrictions that you should be aware of. They will not cover pre-existing medical conditions and automatically cancel if you turn 70 during the coverage period. All things considered, credit life insurance on a car is rarely worth the cost.