Life insurance offered at your bank or credit union: how to evaluate it

You are at the teller window, opening a loan or sitting with a lender, and someone mentions that the bank also offers life insurance. Or an envelope arrives from your credit union with a "member benefit" coverage offer. It is convenient, it comes from a name you trust, and the premium may come out of the same account as everything else. Whether it is a good deal depends on what the product actually is, who stands behind it and how it compares with coverage you could shop for yourself.

This post gives you criteria to judge any such offer and a decision list at the end. The households, premiums and loan amounts are hypothetical illustrations, not quotes from any bank, credit union or insurer.

First, a bank does not sell its own life insurance

Banks and credit unions are not insurers. When they offer life insurance, an insurance company issues the policy, and the bank or credit union markets it, usually through an agreement with that insurer, sometimes with licensed staff, sometimes through a partner agency. The financial institution typically receives a commission or fee for the arrangement. That is not improper, but it explains why the offer finds you.

Credit unions often work with insurers set up to serve credit unions and their members. That can mean familiarity with member needs and, in some cases, products designed for them. It does not mean the price is better than the open market. Treat a credit union offer as one quote among several.

The guide on life insurance offers from banks, lenders and card issuers lists the usual types of products. Here we focus on how to evaluate a specific offer in front of you.

Criterion 1: What kind of coverage is it?

Three different products are sold under the same friendly language.

• Credit life or loan-linked coverage. It pays off some or all of a loan if you die, and the money goes to the lender, not your family. On a mortgage or car loan, the coverage often decreases as the balance falls, while the premium may not. The guides on credit life insurance: what it is and when it's worth it and mortgage protection insurance vs term life explain the difference between this and a term policy. A decreasing structure is the idea behind mortgage life insurance.
• A small simplified or guaranteed-issue policy. Offered to members with few or no health questions, in modest amounts. The cost per $1,000 of coverage is generally higher, and a waiting period, commonly about two years, may limit the benefit for deaths from illness. See guaranteed issue and simplified issue.
• A real underwritten term policy. Some institutions refer you to a licensed agent or a partner for ordinary term coverage. This is the closest to what you would shop for on your own and can be compared directly.

Ask the person making the offer to say which of the three it is. If the answer is "life insurance" with no further detail, ask for the certificate or the sample policy.

Criterion 2: Who is the insurer?

Find the legal name of the insurance company on the paperwork, not the name on the brochure. Then check:

1. Is it licensed in your state? Your state insurance department can confirm.
2. What is its financial strength? Ratings agencies publish them, and the insurer's profile on this site, if it has one, collects what is known. Ratings change, so check a current source.
3. Where do claims go? For loan-linked coverage, the claim is filed by the lender or by you; for an individual policy, your beneficiary files with the insurer.

The guide on how to compare life insurance quotes fairly covers how to check an insurer before you buy.

Criterion 3: Who is the beneficiary, and what does it pay?

The beneficiary is the first test of whether the product serves your family or the lender.

• With credit life, the lender is the beneficiary, to the extent of the loan. Your family receives nothing from the policy, though the debt is cleared.
• With an individual policy, you name the beneficiary, and the money goes to your family.

Both can be reasonable. If your concern is leaving the family with a debt, loan-linked coverage addresses that exactly. If your concern is replacing income, paying living expenses and paying the debt, a level policy that names your family gives them the choice of how to use the money.

Criterion 4: Underwriting and eligibility

Ask what you must answer and what the insurer will check.

• No health questions usually means guaranteed issue: acceptance is assured within age limits, with low maximums and a waiting period.
• A few health questions means simplified issue: some conditions will disqualify you, and the policy may cost more than a fully underwritten one.
• A full application and exam means traditional underwriting, which is the usual route for the best prices for healthy people.

If you are in good health, the "no questions asked" label is a convenience that you pay for. If you have a health condition that makes other coverage hard to get, it may be exactly what you need. The decision turns on your health and your alternatives, not on the brand.

Criterion 5: Price per $1,000

The most revealing number is the cost per $1,000 of death benefit per year, because it makes different offers comparable.

The formula: monthly premium × 12 ÷ (death benefit ÷ 1,000).

Three hypothetical offers:

The arithmetic: $38 × 12 = $456, and $456 ÷ 180 = $2.53. $30 × 12 = $360, and $360 ÷ 15 = $24. $22 × 12 = $264, and $264 ÷ 250 = $1.056, or about $1.06.

Several cautions. These premiums are invented; real prices depend on age, health, tobacco use and the product. The term line assumes a healthy applicant, which not everyone is. And the first line is for coverage that decreases with the loan balance, so the effective cost per $1,000 rises over time if the premium stays the same. Still, the pattern is common enough to explain why comparison matters: small member offers often cost far more per $1,000 than term, and the reason is that they accept more risk with less information.

Use the life insurance quote comparison worksheet to put every offer in the same format.

How a decreasing benefit changes the price you pay

Loan-linked coverage deserves one more calculation, because its value shrinks while its price may not. Say a household takes the $180,000 mortgage offer above, at $38 a month. Ten years later the loan balance, in this illustration, has fallen to $128,000, and the death benefit has fallen with it, while the premium is still $38 a month.

• Yearly cost is still $456.
• Cost per $1,000 is now $456 ÷ 128 = about $3.56, compared with about $2.53 at the start.

The coverage got about 29% smaller ($180,000 to $128,000, a drop of $52,000, which is $52,000 ÷ $180,000 = 0.289), and the price per dollar of coverage rose by about 41% ($3.56 ÷ $2.53 = 1.41). Some programs adjust the premium as the balance falls, and some do not, so ask which one this is. A level term policy, by contrast, keeps the same death benefit for the whole term at the same premium, and its price per $1,000 stays flat.

This is not an argument that decreasing coverage is wrong. Some borrowers want exactly the amount of the debt and nothing more. It is a reason to compare the premium over the life of the loan, not only at the start.

Two hypothetical households

The Garcias. Say Elena and Marco, both 34, are taking out a mortgage and have two young children. Each earns a salary that would be hard to replace. The lender's loan-linked offer would clear the mortgage if either died but leave the survivor with the other bills. They use the How much life insurance do I need? to estimate a need well above the mortgage balance, get open-market quotes for level term naming each other as beneficiary, and decline the loan-linked product. Their reasoning is that the term policy covers the mortgage and everything else, and the money goes to the family to use as it chooses.

Mr. Thompson. Say Mr. Thompson, 66, has had two heart procedures and was declined for underwritten term by one insurer. His credit union offers a $10,000 simplified-issue whole life policy to members his age, with a short health questionnaire. He compares it with the only guaranteed-issue alternative he has found, confirms the waiting period and the refund of premiums if he dies of an illness during it, and decides that a small policy for final expenses is acceptable for his situation. He does not treat it as income replacement. He also tells his family where the policy is.

Both households made reasonable choices. What they did in common was name the product, check the beneficiary and compare price against an alternative before deciding.

Criterion 6: The loan tie-in

Pay particular attention if the offer comes during a loan application.

• Is it optional? Credit insurance is generally optional, and lenders cannot make approval depend on it. The CFPB explains this for auto loans. If you were told it was required, ask for the requirement in writing and consider a complaint to the CFPB or your state insurance department.
• Is the premium added to the loan? If the premium is financed, you pay interest on it. A single premium of a few hundred dollars rolled into a loan costs more than the sticker price.
• Does the coverage end when the loan does? If you pay off the loan early, ask what happens to the premium and whether a refund of the unused portion is due.
• Does the coverage follow you if you refinance or move the account? Loan-linked coverage often ends with the loan.

If the aim is to protect a mortgage, the guide on using term life insurance to cover a mortgage describes an alternative that does not depend on staying with one lender: a term policy sized to the debt, with your family as beneficiary.

Exits: leaving, cancelling and stopping payment

Criterion 7: What happens if you leave the institution?

Individual policies that are issued to you stay with you. Group-style or association coverage offered because of your membership may depend on membership. Ask:

• If I close my account or leave the credit union, does the coverage continue?
• If the program changes, can the insurer cancel it or change the premium for everyone in the group?
• Can I take the coverage with me, and for how long?

A policy tied to an account that you might close is less secure than one that stands alone.

Criterion 8: How you can cancel

Every policy should come with a free-look period, which lets you cancel after delivery and receive your premium back. It is typically 10 to 30 days and longer in some states. Ask for the length in days and read the policy within that window. The free-look period entry in the glossary explains the idea.

Ask also what happens if you stop paying: a grace period, which is commonly 30 or 31 days, and whether the policy lapses or keeps some value.

A decision list

Take the offer through these steps in order.

1. Name the product. Credit life, small simplified or guaranteed-issue, or underwritten term. If the seller cannot say, ask for the certificate.
2. Name the insurer and verify its license and strength.
3. Identify the beneficiary. If it is the lender, decide whether you want to clear the debt only, or provide for your family.
4. Compute the cost per $1,000. Use the formula above. If it is more than several times what you can get on the open market, ask why.
5. Check the loan tie-in. Is it optional? Is the premium financed?
6. Check portability. What happens if you leave the institution or pay off the loan?
7. Get at least one outside quote. Use the same amount and term.
8. Decide.

Then use these rules of thumb:

• If you are healthy and have dependents, you will usually find that open-market term, sized to your need and naming your family, is both cheaper and more flexible than a loan-linked product. Use the How much life insurance do I need? to size it.
• If you have health problems that make underwritten coverage difficult, a member guaranteed-issue or simplified offer may be a reasonable stopgap, especially for a small amount like final expenses. Accept the waiting period knowingly.
• If your only concern is a specific debt and you have no dependents who rely on you, loan-linked coverage can fit, but compare the price against term.
• If you feel pressure to decide at the counter, say you will take the paperwork home. A legitimate offer survives a night.

Questions to ask at the counter

• Who is the insurance company, and what is the form number?
• Is this credit life, accidental death or an individual policy?
• Who is the beneficiary?
• What is the exact premium, how long is it guaranteed and does it change with age?
• What are the exclusions, the waiting period and the benefit during it?
• Is the premium added to my loan?
• Does the institution receive a fee if I enroll?
• How do I cancel, and what do I receive back?

The answers should come in writing. If they come only as reassurance, that is information too.

Key takeaways

• Banks and credit unions market life insurance issued by an insurer; the offer finds you because of an arrangement, not because it was tailored to you.
• Identify the product first: loan-linked credit life, a small simplified or guaranteed-issue policy or underwritten term. They differ in price, beneficiary and purpose.
• Compare offers by cost per $1,000 of coverage per year. In the hypothetical examples, a member guaranteed-issue policy cost about $24 per $1,000 and open-market term about $1.06.
• Check the beneficiary: credit life pays the lender, while an individual policy pays your family.
• Credit insurance is generally optional; do not accept that it is required without seeing it in writing, and watch for financed premiums.
• Get an outside quote, and take the paperwork home before deciding.