Credit Insurance

Do You Need Credit Insurance?

The next time you apply for a mortgage or personal loan, you may be asked if you want to buy credit insurance, or it might already be included in your loan proposal.

Or you might get a flier from your credit card company offering you some form of credit insurance coverage.

Should you buy it?

Types of Credit Insurance

There are four main varieties of credit insurance:

Credit life insurance pays off all or some of your loan if you die:
Credit disability insurance, also known as accident and health insurance, makes payments on the loan if you become ill or injured and can't work:
Involuntary unemployment insurance, also known as involuntary loss of income, makes your loan payments if you lose your job due to no fault of your own, such as a layoff:
Credit property insurance protects personal property used to secure the loan if destroyed by events like theft, accident or natural disasters.

If you can’t make your payments, credit insurance is supposed to protect you – in reality the lender, at least temporarily.

Credit Insurance Is Usually Optional

In almost all cases, credit insurance is optional. The lender cannot slip in this insurance without your knowledge and permission.

This type of insurance tends to be very expensive and carries many loopholes. Many people who buy this coverage find out it doesn’t apply to their situation.

In all cases, the coverage is limited to debts run up before the triggering event. So if you owe $5,000, credit insurance (except credit life) will pay the minimal balance on your debt up to that amount. New charges will not be covered.

Also the coverage is often limited in time. It might only provide a year of coverage if you lose your job or two years of coverage if you are disabled.

Read the Fine Print

You have to read the fine print to find out exactly how the policy would work.

Before deciding to buy credit insurance, think about your needs, your options, and the rates you're going to pay. You may decide you don't need credit insurance after all.

Some questions to ask before buying are:

• How much is the premium?
• Will the premium be financed as part of the loan? If so, it will increase your loan amount and you'll pay additional interest, and more for points (if points are on your loan).
• Can you pay monthly instead of financing the entire premium as part of your loan?
• How much lower would your monthly loan payment be without the credit insurance?
• Will the insurance cover the full length of your loan and the full loan amount?
• What are the limits and exclusions on payment of benefits - that is, spell out exactly what's covered and what's not.
• Is there a waiting period before the coverage becomes effective?
• If you have a co-borrower, what coverage does he or she have and at what cost?
• Can you cancel the insurance? If so, what kind of refund is available?

Before you sign any loan papers, ask the lender whether the loan includes any charges for voluntary credit insurance. If you don't want credit insurance, tell the lender.

Don't Be Pressured

If the lender still pressures you to buy insurance, find another lender.

Review your loan papers carefully to be sure they have been drawn up correctly. Lenders can't deny you credit if you don't buy optional credit insurance or if you don't buy it directly from them.

If a lender tells you that you'll only get the loan if you buy the optional credit insurance, report the lender to your state attorney general, your state insurance commissioner or the FTC.

Cheaper Options

If you want to have your debt paid off at death, shop for fixed term life insurance. Depending on the insurer you might get terms up to 20 years. However, you only need the insurance for the life of the debt. This kind of insurance is vastly cheaper than credit life insurance.

The downside is that this insurance requires a physical in most cases and can be costly if you are elderly. But it pays to shop and compare. Remember that if you have many loans or credit cards you want to protect, you have to buy a separate credit policy for each – no matter which type of credit insurance you are considering.

With term life you have only one premium for coverage that could cover all your debt.

A long term disability policy would replace most of your income if you become disabled. This is not cheap insurance either, but in most cases it protects you for the full time you are unable to work. Furthermore, it replaces your lost income, not just minimum debt payments. High earners with a family should really have this insurance in any event.

Involuntary unemployment insurance is available for various brokers. But most people already have state unemployment insurance. It's difficult to judge the value of such a policy since you don’t know how long you will be out of work and if your new job will pay as well as the old.

Credit property insurance might just duplicate coverage you already have with your home owners or renters insurance. Some credit cards offer this coverage for free.

If you want to buy any of these coverages, shop around and compare premiums. You are not required to buy through the lender – you are not obligated to buy at all. Don’t let the lender add this coverage to the balance of your loan. You just wind up paying interest on already overpriced insurance.

In the long run you would be better off meeting with a respected full service insurance broker and setting up a plan of insurance that covers all of your anticipated risks at a reasonable price.

If you have an emergency fund, this should cover your uninsured risks. Then you can take a pass on expensive credit insurance.

  | Top | Credit Cards | Home |