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Credit Tips: Do I Really Need Credit Insurance?

Written by Ilyce Glink on April 21, 2014 in Credit  |   No comments

If you are applying for a loan on a big-ticket item, such as a house or car, your lender might ask if you’d like to purchase credit insurance. Sold with either a loan or other credit obligation, credit insurance protects your loan if you can…

credit tips If you are applying for a loan on a big-ticket item, such as a house or car, your lender might ask if you’d like to purchase credit insurance.

Sold with either a loan or other credit obligation, credit insurance protects your loan if you can no longer make your monthly payments as a result of death, disability, or, in some circumstances, unemployment.

To determine whether credit insurance makes sense for you, consider what it covers, how much it costs, and if you can find the same protections under other types of insurance policies.

Credit tips: What does credit insurance cover?

When you hear lenders talking about credit insurance, they are often referring to credit life insurance, which is also known simply as credit life. With credit life insurance, all or some of your loan will be paid off if you die during the term of coverage.

There are three other main types of credit insurance:

If you have credit disability insurance, payments will be made on your loan if you suffer from an illness or accident and are unable to work.

Involuntary unemployment insurance makes your monthly loan payments for a predetermined amount of time if you lose your job due to no fault of your own, such as a layoff.

Credit property insurance protects any personal property that is used to secure a loan if that property is destroyed by theft, accident, or natural disaster.

While credit insurance protects your lender from losing the money you borrowed, it can also protect you from losing your savings or property in the event that you stop paying on the loan. In the case of your death, the title to the underlying asset would be transferred—potentially free and clear—to your estate and then to the estate’s beneficiaries.

How much does credit insurance cost?

How much you dish out for credit insurance will typically depend on the kind of credit insurance policy, the amount of your loan or debt, and the type of credit.

“Credit insurance is sold to protect the lender more so than the borrower,” says Greg McBride, chief financial analyst at Bankrate. “As a result, pricing doesn’t tend to be as favorable to the borrower.”

Credit life insurance is usually expensive, and it’s generally more costly than a standard life insurance policy. This is especially true for younger consumers, according to the Ohio Department of Insurance, but a small credit life insurance policy tends to be more expensive than a regular life insurance plan, even for older consumers.

“By and large, particularly for people who are healthy, you can buy a whole lot more life insurance than you can credit insurance for the same amount of money,” McBride says.

This is because credit insurance is a higher-risk product, and eligibility is only based on a consumer’s status as a borrower. In contrast, the results of a consumer’s medical exam and his or her health details help to determine the price of a life insurance policy.

If you do purchase credit insurance, the policy premium is generally rolled into your loan, increasing not only your total loan amount but also how much you pay in interest over the life of the loan.

Weighing the pros and cons

If you are having trouble qualifying for a standard life insurance policy, credit life insurance may be a suitable alternative because a medical exam isn’t required.

Credit life insurance could also be a good option if you are entering a joint credit obligation with a spouse that is either a stay-at-home partner or works part time, McBride says. That way, your spouse wouldn’t be burdened by a high monthly loan payment in the event that you can no longer pay.

Additionally, McBride notes, consumers who are living paycheck to paycheck and don’t have a lot of wiggle room if they were to be unexpectedly laid off may find involuntary unemployment insurance to be a worthwhile protection.

Credit insurance isn’t for everyone

If you have enough life insurance to pay off your loan if you die before the amount borrowed is repaid, you may not need credit insurance. Your savings account—which is known as self-insurance—could also alleviate any need for credit insurance.

“Depending on your overall financial situation, you may have sufficient assets or life insurance that could cover the regular monthly obligations without having to purchase credit life insurance,” McBride says.

You could also be eligible for disability coverage through your employer, which means you would not need to invest in a costly credit disability policy. In addition, your homeowner’s or renter’s policy could provide equivalent coverage to a credit property insurance plan.

Keep in mind that lenders can’t deny you credit if you decide not to buy credit insurance or if you choose to buy it through another party. It’s also against the law for lenders to roll credit insurance into your loan without your consent, according to the Federal Trade Commission (FTC).

If you are working with a lender that says you are required to buy optional credit insurance in order to qualify for the loan, you can file a report with the FTC, your state insurance commissioner, or your state attorney general. Remember to always read the fine print before signing any loan documents.

Ilyce Glink is the author of over a dozen books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In! Her nationally syndicated column, “Real Estate Matters,” appears in newspapers from coast-to-coast, and her Expert Real Estate Tips YouTube channel has nearly 4 million views. She is the managing editor of the Equifax Finance Blog, publisher of ThinkGlink.com, and owner of digital communications agency Think Glink Media. In addition to her WSB radio show and WGN radio contributions, she is also a frequent guest on National Public Radio. Ilyce is a frequent contributor to Yahoo and CBS News.

The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.

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