Credit Life Insurance

by Mark Albertson


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Well, here you are, sitting in the Finance and Insurance office, ready to do the paperwork on your new car. Facing you is the business manager, that smooth-talking peddler of running boards, rust proofing, mud guards and extended warranties. Included in his sales pitch will be a loan protection vehicle called credit life insurance. However, like everything else the business manager sells, is credit life insurance something you really need?

Credit life insurance is a policy designed to pay off your loan in the event of your death. Credit life policies are not only available on car loans, but for such purchases as furniture, appliances and trucks. Variations include credit disability insurance and credit unemployment insurance. The former provides coverage that makes payments to the loan holder in the event you become sick or disabled. The latter takes up the loan payments if you become involuntarily unemployed.

Credit life insurance is decreasing term insurance. The policy is issued for the face amount of your loan. As you pay off your loan, the face amount of your coverage declines. If you happen to die before the loan outstanding is satisfied, the policy pays off the remainder of the loan.

When the business manager pitches credit life, do not lose sight of one very important factor: This form of protection is paid for by you as the borrower. But you reap none of the benefits. If something should happen to you, benefits are remitted to the lender. So in essence, you are footing the bill for the financial institution's guarantee of loan payment in the event something should happen to you. Sound like a deal for the lender? You bet it is. What does he care whether you live or die. He gets paid anyway!

Credit life can be paid for in a lump sum or payments can be made on a monthly basis. With the latter, it gets added to your loan. This not only inflates your monthly payment, but you wind up paying interest on the insurance.

Credit life can be sold as a separate policy, or it can be packaged with disability and unemployment insurance. You may be told that you have to buy the entire package to qualify. To keep the provider honest, check with your state's Department of Insurance for clarification.

Credit life usually can be purchased without a physical examination. However, a credit insurance application may ask about your medical history. Pre-existing conditions, such as cancer or heart disease, may cause coverage to be denied.

Credit life policies are generally capped. Policy ceilings depend upon the laws of the state in which you reside. Caps on credit life policies generally affect mortgages more so than auto loans. This is because homes cost so much more than cars. Be advised, though, that if you paid your premium in a lump sum, your coverage cannot be denied. However, if you pay your premium by monthly installment, your lender or credit life provider can cancel your coverage at anytime and without advanced notice.

The average cost of credit life insurance is about $.50 for every $100 borrowed. Let's say that you took out a $20,000 auto loan for five years. This means you are paying $100 per year for protection on a loan for which the benefits do not go to anyone else but the lender. This is hardly a bargain when you consider how you might qualify for $100,000 in term life insurance for maybe $100 per year. With the latter, if you die, the policy will pay off the remainder of the auto loan, funeral expenses and other obligations. And whatever is left over goes to those you have designated as your survivors.

Because of the availability and cost effectiveness of term life insurance, most folks today do not need credit life insurance. Term insurance can almost always be purchased on a lower cost-per-dollar basis than credit life. And as shown by the example in the preceding paragraph, that includes term policies of much greater face amounts. Term insurance can be purchased from almost any insurance provider or savings bank. You may also want to check with your employer. You might find term life insurance among the benefits available to you where you work.

Despite its declining popularity, credit life insurance is still offered by many dealerships. It can also be purchased from your bank or credit union. But with many of today's consumers able to afford term insurance and the availability of other forms of loan protection such as debt cancellation and GAP insurance, credit life is fast going the way of the dinosaur.

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