Credit Protection: Watch Carefully By Dr. Bernice Wilson, Resource Management Specialist

Consumers are often confronted with the opportunity to buy credit insurance with certain kinds of financing. These opportunities usually come along with credit cards, some home loans, and loans available through department stores or car dealers. Credit insurance is a type of life, accident, health, disability, or unemployment insurance that will pay off the bill or debt if the borrower dies, becomes sick, injured, or loses his/her job. State governments usually regulate credit insurance sales in the state, while insurance departments enforce these laws that involve pricing, disclosures to buyers, minimum insurance benefits, and other consumer-related insurance and protection issues.

In most types of credit insurance, consumers can decline or accept the offer to buy the insurance. An exception to this rule is property or hazard insurance. Creditors may require the consumer to maintain this kind of insurance to cover the costs of repairing or replacing properties for a home or a car that also serves as collateral for the loan. If this is the case, a bank cannot use the approval of the loan as a hedge to get you to buy the insurance.

Consumers should be on the watch for other credit-related products with credit insurance similarities such as debt cancellation or suspension programs. These products are sold under many different names depending on the lending institution. Debt cancellation insurance covers the debt if the borrower dies or cancels the monthly payment, or if the borrower becomes disabled, unemployed, or endured some other hardship. On the other hand, debt suspension is different. It temporarily delays all or part of the monthly payment while the borrower is facing a specified hardship. Nevertheless, the borrower is still expected to make the suspended payments in the future. These programs may function similar to credit insurance, but their fees and other features may be quite different. Depository institutions offer debt protection programs directly to the borrower, not through insurance companies. These programs are subject to regulations by the appropriate federal or state depository institutions.

The Pros:

1. Credit protection products may offer the borrower security or peace of mind, and may be a good investment.
2. Credit protection products are advertised as an "easy to buy" line of goods because it often does not require a physical examination like traditional life or disability insurance. Premiums are the same regardless of age and health.
3. Coverage can be purchased in small dollar amounts.
4. Credit protection programs may be the best and sometimes the only coverage for some older consumers, people who smoke or are ill, or workers concerned about making loan payments if they lose their job.

The Cons:

1. Other types of life and disability insurance may carry higher minimum coverage amount than those for credit insurance, which is based on the size of the debt. For example, instead of buying a traditional life insurance policy for $10,000 or $20,000 in coverage, a consumer could buy credit insurance based on the balance of the loan, which could be less than $10,000 or $20,000. Taking these considerations under advisement, credit insurance and debt cancellation or debt suspension programs typically cost far more than a comparable term-life insurance policy. Term insurance provides protection for a specified period and perhaps other insurance not sold with a loan.
2. Credit protection programs can only be used for one purpose, to repay a specific debt.
3. If you have credit insurance or debt cancellation/suspension coverage to pay off a credit card debt and find yourself unable to pay the debt because of illness or death, and typically you carried a balance of $4,000, reliable sources suggest that you will pay between $150-$350 a year for this credit protection. You may fair better buying a large-term insurance policy or putting it in an emergency or another saving account. Both of these saving instruments may be used to pay off any obligations, not just credit card debt.
4. Some debt cancellation programs limit death benefits only to accidental death. Death due to accidents is less common than death because of sickness, disease, or natural causes.
5. Conversely, credit insurance providing a death benefit is rarely limited to accidental death.
6. The typical credit insurance policy covering disability or unemployment will make the borrower's monthly payment on a loan during the benefit period. On the contrary, a debt suspension program only puts loan payments on hold.
7. If you become ill or unemployed and you apply for benefits under a debt suspension program for a credit card or a home equity loan, the contract may disallow your use of the credit card or the home equity loan.
8. Single premium credit insurance is available through some creditors, and is paid in a lump sum up front instead of monthly or annually. The one-time payment typically is so large that consumers add the fee to their loan amount and must pay interest on it each month. This would cause the loan payments to increase and remain for the life of the loan; meanwhile it is possible that the insurance may only cover the first five years of the loan.

Helpful Protection Tips:

1. Credit protection is usually optional. Check before you buy. You may also contact the appropriate state or federal regulator for more information.
2. Review the costs of your insurances annually to determine if you are underinsured or over insured in some areas. Seek guidance from your insurance agent or financial adviser.
3. Before you buy credit protection, find out if you would be better off with a traditional insurance policy. If you're in good health, you may find that a traditional insurance policy meets your needs and costs less money than a credit protection plan. However, the elderly or some people who are in poor health or concerned about making loan payments if they lose their job, credit protection may be the best or only coverage they can obtain.
4. In considering a credit protection program, understand what is covered, what is not and whether the cost and restrictions outweigh the benefits. This type of insurance only applies to specific debts. Money from a traditional policy that can be used to pay off any debts and expenses as you see fit is probably a better deal.
5. Consumers should read the terms and conditions of these programs so that they will know the limitations and not pay more for less coverage than they expect.
6. Review your loan documents and monthly statements regularly to see if there are any unusual charges or fees. For instance, a creditor has the right to purchase property or hazard insurance and charge you for it, if you are required yet fail to maintain such coverage. You could end up paying more for a policy purchased by the lender.
7. Resolve problems quickly. The first point of contact should be the creditor or insurance company. If you are not satisfied with their assistance, then contact your state insurance commissioner or the appropriate federal of state regulator such as the Alabama Attorney General's Office.
8. Lastly, keep copies of your loan documents and related credit protection policies, terms, and conditions. You may need to refer to this information if questions or other concerns arise.

If you have a Question or Problem Contact:

Alabama Department of Insurance
P O Box 303351
Montgomery, AL 36130-3351
334-241-4174

Office of the Attorney General
Alabama State House
11 South Union Street, Third Floor
Montgomery, AL 36130

Consumer Affairs Division
1-800-392-5658

Office of Victim Assistance
1-800-626-7676

References

Federal Deposit Insurance Corporation. (Summer 2003). Credit protection: What to consider before you buy. FDIC Consumer News. Retrieved April 5, 2004.

Federal Trade Commission. (November 2002). Credit insurance: Is it for you? Consumer Alert. Retrieved April 5, 2004.