What is Credit Insurance?
Credit insurance assures a loan will be repaid in the event of the death, disability or involuntary unemployment of the insured borrower. It can be taken to protect all types of consumer borrowing, including loans to finance or refinance a home. These products may be sold by credit card companies, auto dealers, finance companies, department stores, furniture stores or wherever loans are made and credit extended for the purchase of personal property.
There are five principal types of credit insurance:
1. Credit Life Insurance insures that a borrower’s insured debt will be repaid if the insured borrower dies during the term of the coverage.
2. Credit Accident and Health Insurance, also known as Credit Disability Insurance, pays a limited number of monthly payments on a specific loan or credit card account if the borrower becomes disabled during the term of coverage.
3. Credit Involuntary Unemployment Insurance pays a limited number of monthly payments on a specific loan or credit card account if the borrower becomes involuntarily unemployed during the term of the coverage.
4. Credit Property Insurance pays to repair or replace personal property purchased with the loan or credit proceeds and/or serves as collateral for the credit if the property is lost, damaged or stolen. Unlike the first three credit insurance products, credit property insurance is not directly related to an event affecting a consumer’s ability to pay his/her debt.
5. Credit Card (Fraudulent Use) Insurance simply stated is protection against unauthorized use of your credit card in the event that your card is lost or stolen.
Benefits of Credit Insurance
• Credit insurance is affordable because it is based on group rates. This means that generally all consumers or borrowers who voluntarily select credit insurance pay the same rate in their state.
• The cost of Credit Life Insurance for middle aged and older consumers is generally less than term life insurance.
• Credit insurance is generally offered and written with few, if any, underwriting conditions that apply to other types of insurance.
• Consumers can generally obtain credit insurance, including credit life insurance, without the need to fill out a medical history, take a medical examination, or disclose if they are smokers.
• Federal and state laws require that consumers be told credit insurance is a choice and is not required to obtain a loan. Credit insurance is always optional.
• Consumers can get a “free look” at credit insurance by getting a full refund within a set period that usually ranges from 10-30 days. Consumers can cancel the trial at any time before the set time period and receive a prorated refund of any premiums paid.
• State laws and regulations establish credit insurance rates, which have been adjusted and regulated to protect consumers in a majority of states within the past five years.
• Credit Life and Disability Insurance rates do not rise as an individual ages. There is one rate for everyone, regardless of age or medical condition.
Do You Need This Insurance? Let us look at Credit Disability Insurance and Credit Involuntary Unemployment Insurance. Remember, these insurance plans will pay your credit card bills if you become disabled or you lose your job. These plans may be a good thing if your potential sources of income would not be enough to pay your monthly debts in the event of your disability or unemployment. However, there may be a waiting period before you receive your first benefit payment and the insurance may only pay the MINIMUM card payment each month (up to the policy coverage limit). Consequently, unless you are disabled or out of work for a very long time, the cost of the premiums could easily exceed any monthly benefits.
Likewise, insurance that will pay off card balances in the event of your death make sense only if you have a lot of credit card debt and little or no other life insurance. You might be better off insuring yourself against income loss or death by purchasing regular disability or life insurance instead of credit insurance.
Credit Property Insurance guarantees the purchased item or property value of the loan amount. For example, if you used an item that is collateral for a loan and that item was damaged, then its value as collateral may now be worthless but your obligation for the full loan amount has not changed. That is why the lender may require this insurance in order to guarantee the collateral against the loan.
Some telemarketers are aggressively selling insurance that covers the fraudulent use of your credit card. Do you really need that kind of credit card insurance? Most experts say no. Remember, Federal Law already limits your liability to the first $50 of fraud losses per account, provided you make a reasonable effort to notify the card issuer of any lost or stolen cards within a reasonable period of time. In many cases, the issuer will waive the $50 requirement. If your card issuer insists on the $50 payment, then check with the company that insures your home because your existing homeowner’s policy may cover the loss. If you are considering credit card insurance, ask yourself these questions:
• Why do you want this type of protection?
• What benefits will you gain from it and how much are you willing to pay?
Finally, make sure you are dealing with a legitimate insurance company. If you have doubts about the policy or the company, contact your state government insurance commissioner or office of consumer affairs. Never give your credit card number and information to anyone selling credit card loss protection over the telephone because you may be dealing with a con artist who could make unauthorized charges to your card.
DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt. Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email contact@dmcconline.org.
