Credit insurance provides coverage in the event you are unable to pay debt related to a credit line you accepted in the past, whether a mortgage, refinanced loan, or credit card. This form of insurance and what it provides is not well known to most consumers, so they typically don’t seek out the coverage. It is usually offered by lenders during the application process, and has recently come under fire due to its predatory use in the subprime lending market.

Overall, credit insurance provides four types of coverage that ensures protection of the policyholder and full repayment of the loan. Credit life insurance repays a loan or lent amount in case of a policy holder’s death; this is usually the type of credit insurance offered with mortgages. Credit disability and unemployment insurance ensure minimum payments to credit card companies are paid while you are unable to or if you are incapacitated and cannot work. Finally, if you purchase an item on credit that is later damaged or destroyed (in specific instances), credit property insurance absolves you from the debt related to the property loss.

Nonetheless, even if credit insurance may be a good idea for some consumers, the product and its marketing are problematic. First, because there is no qualification process like all other forms of insurance, rates are broadly priced and not tailored to individual consumer profiles. You have good credit and may be a low credit risk, but it does not change your premium, as those factors are not taken into consideration. Additionally, there is no application or acceptance process; it often just takes a verbal “yes” or a check in a box to accept coverage---often without full disclosure of terms and coverage details.

But the biggest issue with credit insurance lies in the virtually defunct subprime lending market. Unscrupulous lenders have been found to coerce consumers (who are desperate for loan approval) into accepting credit life insurance, claiming they would otherwise not be approved if they don’t accept the policy. Lenders may have also charged subprime consumers for the cost of the entire policy up front in order to gain greater profits. However, if or when the loan that has credit life insurance attached is refinanced, the coverage ends, with the consumer essentially taking a loss for a policy already paid.

The Federal Trade Commission provides various tips to use when being offered credit insurance to help you decide whether it is the right type of coverage for you. With regard to premiums and payments, the FTC suggests finding out what the monthly premium will be, whether the credit insurance policy will be financed with the loan, and what the differences in both the premium and the loan payment would be if the policy and the loan were billed separately. With coverage limitations, ensure you know the exact terms, including benefits payouts, coverage effective dates, who is covered (including co-borrowers), and cancellation procedures before accepting the policy.



References

Federal Trade Commission. Consumer Alert: Credit Insurance: Is it Right for You?

Bobbie Page. The 5 Step Guide to Considering Insurance Offered by Credit Card Companies

Author, Unknown. Credit Insurance