Credit Life Insurance, Sometimes Attached to Car Purchases, Is Overpriced

We all know that many Americans are deep in debt right now. I worry that may leave some vulnerable to purchasing bad products that we don’t know much about, or purchasing bad products without realizing there are better options.

In the insurance business one of those dubious products is called “credit life insurance.” Credit life is life insurance that pays off a consumer debt if you die.

Credit life isn’t normally sold by itself. Salespeople typically sneak it in when you finance a big purchase like a car because it generates hefty commissions for them. And it’s overpriced.

For the amount of money you spend on credit life insurance, you can buy far more regular life insurance. Plus, credit life coverage is severely limited. It doesn’t cover pre-existing medical conditions. If you will turn 70 during the policy period, it often becomes null and void. And your family isn’t named as the beneficiary -- the lender is!

When Don P. bought his first brand new car it was also a brand new financial experience. The salesman told Don the bank wouldn’t give him the loan unless he bought $3,600 worth of credit life insurance!

Don was so eager to get that car that he signed the paperwork. But he was troubled. He did some research and learned it’s illegal for salespeople to force you to buy credit life. Don confronted the dealership and his payments dropped from $326 a month to just $250 a month.

If you’re single with no dependents and have enough cash or assets to pay for your burial, you probably don’t need any kind of life insurance.* If you have a family you’d like to protect, make sure your regular life insurance policy is large enough to cover any new consumer debt.

The whole premise of credit life is somewhat faulty. Why? Most people don’t realize that when you die, your heirs are not obligated to pay off your debts unless their names are on the accounts along with yours. However, in the case of a car or a boat or other item for which the bank holds a lien, the bank can still repossess the item to satisfy the note. If in the event of your untimely death you would like your heirs to keep ownership of the item you purchased they will need to pay off the loan or take over the payments. Credit life insurance really benefits the creditor more because they would rather have the loan paid in full than have to liquidate the asset with the chance that they can’t recoup the entire balance on the loan.

Do Your Homework

Scan any financing agreement carefully in search of signs of credit life and ask that it be removed.

If a salesperson insists that you buy credit life to get a loan, check with your state insurance commissioner. Some states allow lenders to require credit property insurance on loans in which you use property or possessions as collateral.

If you learn you’re already paying for credit life, you can cancel it any time you want. You should receive a pro-rated refund.

How to Complain

If a salesperson tries to sneak credit life into your contract or tells you it’s required, complain to your state insurance commissioner.

Credit life insurance = decreasing term insurance

Credit life is similar to a special type of life insurance called “decreasing term” insurance.

• A credit life policy is issued for an amount equal to how much you owe.

• As your loan balance decreases, so does the face amount of the credit life policy.

• If you die before the loan is fully repaid, the policy pays the lender an amount equal to what you still owe at that time.

Younger people usually can buy decreasing term life insurance for much less than a credit life policy costs. The decreasing term policy will meet the lender’s requirement for protection on the loan. As you get older, the cost of buying regular life insurance rises. However, in most cases, it is very expensive to buy a small credit life policy as a substitute for regular life insurance protection. What most people don’t realize is the insurance company often sets the rate for credit life policies based on the most they might have to pay out, even though that amount decreases month by month. In other words, credit life insurance is generally not much cheaper than level term, if at all.

Here’s a recommendation when you wish to cover your credit obligations and make sure your family can pay off those loans without hardship in the event of your death:

Today’s level term rates are very affordable and obtaining coverage is fast and convenient. For younger people enough insurance to cover all of your debt obligations, not just your automobile loan, can be less than $10 a month. Often the rates for level term from a top insurance company are less than the credit life you get from a retailer or dealer. The best part about level term is your death benefit does not decrease. So even as your balance owed goes down with each monthly loan payment, the value of the insurance remains the same. Plus, the death benefit is paid to your beneficiary, not the lender, so your beneficiary is free to pay only those obligations that are required and any money left is theirs to keep.

Also, a level term policy can be issued with many options for the amount of death benefit, length of term and payment mode. In some cases you can add disability income or critical illness riders that can provide income if you're unable to work or become seriously ill. In other words you often can get more coverage and better coverage for the same or less money.

For example:

A 25 year old male, non smoker, can obtain $50,000 of term coverage with approval by phone in 15 minutes from Liberty Insurance for less than $10 a month. For $25,000 it’s around $5.00. Those policies would cover most car loans but would never decrease during the term. If you’re female your rates are even less! Just $3.40 a month for $25,000 of coverage for as long as you need it up to ten years. A 45 year old male can cover the loan on that new BMW for less than $20 a month.

Keep in mind the examples above are for easy issue term which can be done entirely by phone. If you would like coverage that is even more affordable you can apply for standard policies that may cost less but would require the normal underwriting procedures for that company. This a better option for amounts of $100,000 and up.

If you’re in the market for a car, boat or RV and think a life insurance policy makes sense be sure to request a quote before you visit the dealer. You may wish to consider insuring ALL of your consumer debt with one policy to provide greater protection for your family. Submit a quote form and let’s talk about your needs and goals and put together a life insurance plan that is right for you!

* True, you don't need life insurance if you happen to die. But owning a cash value policy such as whole life or universal life is always a wise investment. Rates are always lower the younger you are. The sooner you own an insurance product, the less expensive it will be for you! With a permanent policy the rates will never go up and your cash value can grow tax free. Request a quote for some illustrations.