Credit Life Insurance Calculator (Loan Protection Insurance Cost)
Calculate what credit life (loan protection) insurance adds to a loan: the monthly premium on the outstanding or original balance, the total insurance cost and the annual rate including insurance.
How it works
Loan payment = P × i ÷ [1 − (1 + i)⁻ⁿ] · monthly premium = balance before the payment × q (decreasing) or P × q (level) · total insurance = Σ premiums · annual rate with insurance: solve P = Σ (payment + premiumₖ) ÷ (1 + j)ᵏ, rate = 12 × j
Credit life insurance — also called loan protection or payment protection insurance, and seguro de desgravamen in much of Latin America and Spain — pays off the remaining loan if the borrower dies (and sometimes if they become disabled). Lenders usually charge it as a monthly rate on the outstanding balance, so the premium shrinks as the loan is repaid; some charge a level premium on the original amount, which costs much more. Because the premium is paid with every installment, it raises the true annual cost of the loan, so compare offers on the rate including insurance and check whether you may buy an equivalent term life policy elsewhere.
Worked example
A 20,000 loan at 12% for 48 months has a payment of 526.68. With credit life insurance at 0.05% a month on the outstanding balance, the first premium is 20,000 × 0.0005 = 10.00 (a first payment of 536.68), and the premiums fall with the balance to a total of 264.02 — 5.00% of the 5,280.48 of interest. Counting the insurance, the annual rate rises from 12.00% to 12.60%.
Sources: Wikipedia — Credit life insurance · NAIC — Credit insurance
Frequently asked questions
How is credit life insurance calculated?
Multiply the outstanding balance (or the original amount, depending on the contract) by the monthly insurance rate. At 0.05% a month on a 20,000 balance the first premium is 10.00, and it falls every month as the balance goes down.
Is credit life insurance mandatory?
Many lenders require it for mortgages and some consumer loans, but in many countries you may present your own life policy instead (endorsed to the lender). Ask whether you can shop around — the lender’s policy is often more expensive.
Is it better on the balance or on the original amount?
A premium on the decreasing balance costs roughly half of a level premium on the original amount over the life of an amortizing loan, while the coverage you need also falls with the balance.
Should the insurance be included when comparing loans?
Yes. Official cost measures such as the APR, CAT or TAE include mandatory insurance in many countries. Compare the annual rate including insurance, not just the interest rate.
Related calculators
Educational estimate, not financial advice. Real contracts, fees, taxes, day-count and rounding rules differ — check the official cost disclosure and your agreement before deciding.