Consumer Information About Credit Insurance
Credit Life and Disability insurance is a way for consumers to insure loans and protect income so that what a borrower owes can be repaid even if the borrower dies or becomes disabled. Credit insurance can be purchased to insure all kinds of consumer loans, including auto loans, credit card debt, loans from finance companies, and home mortgage borrowing.
Credit insurance helps fill the need of consumers to buy small amounts of insurance easily and cost effectively. When it comes to life insurance many consumers are uninsured or underinsured. Either they don't have any or they have only a little. Total non-mortgage consumer debt in the U.S. rose to $1.5 trillion at the end of 2000. Repayment of about one-seventh of this debt ($212 billion) is protected by Credit Life insurance. Many times, insurance can be issued by answering one or two simple health questions at the time of a loan closing, saving time and money.
A lender may require that you have insurance to secure a loan, but they may not require that you purchase it from them (see LRS 22:1599).
Higher income consumers who can afford large amounts of life insurance probably do not need credit insurance. If you have little or no life insurance or disability insurance, however, credit insurance may be the most cost-effective way to quickly obtain insurance and protect your financial assets. Let’s compare a credit life decreasing term insurance to insure the average-size closed-end loan protected by this kind of policy ($6,000) for a typical loan period of three years to the cost for a $50,000 renewable term life insurance policy.
We'll compare the costs for a three-year period.
We'll make the comparison at a rate of 80 cents per $100 for credit life insurance and 30 cents per $100 of term life insurance plus a $50 annual policy fee.
We'll use those rates because the one for credit life insurance is the rate for Louisiana while the rate for term life is fairly typical and standard.
The total three-year credit life insurance cost would be $170 plus $24.51 of extra interest on the loan to pay for the insurance (total of $190.51 for three years).
The term life insurance would provide substantial extra protection and would cost $175 the first year. Every year the rate and the cost for the term life may increase as the insured person ages. The three-year cost of the $50,000 term life policy would actually add up to $475. In fact, many insurers will no longer issue term insurance policies under $100,000 so even this comparison may not be valid and costs may be higher 1.
If all you want or can afford is credit life insurance, then term life insurance simply does not meet your needs and credit insurance is the right answer.
On the other hand if you can afford the higher amount of term life insurance, and it meets all your life insurance needs - including debt repayment, then term life insurance may be the right answer for you.
Only you know what you need and can afford.
1Example given for illustration purposes only. Results may vary based on individual circumstances.