| Credit insurance is one of the most | | | | them while you were around, life insurance is a |
| misunderstood and fraudulently marketed | | | | very expensive "estate substitute". It is better to |
| products in the field of personal finance. The | | | | put your money into savings than to pay it to |
| types of insurance sold by creditors to debtors | | | | some national insurance corporation on the hope |
| range from the old standard credit life and | | | | that you will profit by dying. With life insurance |
| accident and sickness insurance to such worthless | | | | you are essentially betting that you will die and |
| contracts as "life events" which will be explained | | | | the insurer is betting you won't. |
| below. Almost all of these policies are grossly | | | | Assuming you decide you need life insurance, the |
| overpriced and are a source of substantial profits | | | | next question is whether to buy it from a creditor |
| for lenders and sales finance companies. | | | | or on the open competitive market. Most of the |
| The use of insurance as a type of security for a | | | | time it is best to purchase a proper amount of |
| loan or other extension of credit is not an | | | | term life insurance payable either to a beneficiary, |
| inherently a bad choice. Both the creditor and the | | | | or to a trust for the benefit of minor dependents, |
| debtor can benefit from removing the risk of | | | | or to your estate to be used to pay your last |
| death or disability from the equation. If the | | | | rites and obligations. If you have it paid to a |
| reduced risk is a factor in providing a lower | | | | beneficiary, such as your spouse or children, your |
| interest rate, or in basic credit approval, it can be | | | | creditors cannot claim it for the payment of your |
| a win-win situation. The problem arises, however, | | | | bills....unless you designate a particular creditor as a |
| when the creditor intimidates or otherwise induces | | | | beneficiary to the extent of your debt obligation. |
| a customer to purchase an insurance product not | | | | No creditor has an insurable interest in your life |
| for its effect on risk but as an additional and | | | | except to the extent of your debt. |
| substantial source of revenue. | | | | If you owe a mortgage debt on your home it |
| Normally insurance rates are set by the | | | | may be wise to scale your term life policy to |
| competitive market, which tends to hold rates | | | | approximate the amount of your mortgage so it |
| down at least for the reasonably informed | | | | will be paid off for the benefit of your spouse and |
| consumer who does some comparison shopping. | | | | children if you, a provider, cannot provide. If you |
| Automobile insurance companies, for example, are | | | | have a car note you need to adjust your total life |
| highly competitive and the rates are seldom | | | | insurance amount to discharge that obligation as |
| regulated. But in the context of an application for | | | | well, so that whoever gets the car gets it free |
| credit there may be no competition at the point | | | | and clear. If you don't care what happens to the |
| of sale of the insurance. The creditor may be the | | | | vehicle don't worry about the additional coverage. |
| only practicable source. The only "competition" is | | | | The creditor will take it and sell it and eat the |
| between insurance companies to see who can | | | | balance. It is theoretically possible for a sales |
| charge the highest premium and pay the highest | | | | finance creditor to sue an estate for a deficiency |
| commission to the creditor or its officers for | | | | after repossession but it very seldom occurs. It's |
| selling the coverage. This tends to force rates up | | | | just too much trouble. |
| rather than down and has been dubbed "reverse | | | | Aside from large obligations such as home |
| competition". | | | | mortgages and car notes there is usually very |
| During the 1950s as consumer credit was | | | | little justification for buying life insurance, and |
| expanding rapidly and many states had strict | | | | certainly not from a creditor. The premium rates |
| usury laws (laws limiting maximum finance charge | | | | on creditor-provided life insurance are much |
| rates) both lenders and sellers began relying on | | | | higher, as a general rule, than the rates for other |
| commissions from credit insurance premiums to | | | | life coverage. |
| pad the bottom line profits. Many engaged in | | | | Credit life insurance comes in three varieties...level, |
| selling excessive coverage (not needed to pay | | | | decreasing, and revolving. Level life insurance |
| the debt if something happened to the debtor) | | | | begins and ends with the same coverage over |
| and nearly all charged outrageous premiums, with | | | | the term and is normally associated with single |
| 50% or more being paid to the creditor or its | | | | payment obligations. It is illegal in most states to |
| employees, officers or directors as "commissions" | | | | sell level life insurance on installment transactions. |
| for writing the coverage. As incentives for paying | | | | Decreasing credit life comes in two |
| as few claims as possible there were also | | | | sub-varieties...gross and net. Gross decreasing |
| "experience refunds" awarded to creditors, which | | | | credit life begins with the "total of payments" (the |
| sometimes raised the total compensation to 70% | | | | principal plus all interest you will probably have to |
| or more of the premiums. In addition, the | | | | pay over the whole term of debt) and decreases |
| premium was added to the loan or unpaid balance | | | | by one monthly payment each month until it |
| of the sale price and finance charges were | | | | reaches zero at the end of the term. Net |
| charged on the premium. | | | | decreasing credit life starts at the "amount |
| Finally the National Association of Insurance | | | | financed" and declines as the principal balance |
| Commissioners (NAIC) declared it had had enough | | | | declines over the term. Usually net decreasing life |
| of the consumer abuse and model legislation was | | | | is enough to pay the obligation because it tracks |
| drawn up and passed in nearly every state | | | | the remaining principal, unless you fail to keep up |
| authorizing insurance commissioners to limit the | | | | with the payment schedule and reduce the debt |
| amount and cost of credit life and accident and | | | | accordingly. Gross decreasing life will normally be |
| sickness insurance...the two biggest sellers in the | | | | excessive at the beginning and less so as the |
| field. In some jurisdictions the legislation had very | | | | term continues. For example, if the principal is |
| little effect because the commissioners would not | | | | $10,000 and there will be $4000 in finance |
| seriously exercise their new regulatory powers, | | | | charges on a car note over a six-year term, the |
| but in others the rates came down almost | | | | insurance will start at $14,000, but during the first |
| immediately. Over a number of years where | | | | month the debtor in fact only owes $10,000 plus |
| there was pressure from consumer groups the | | | | a few days interest. This means that if the |
| rates on these two products reached a | | | | debtor dies during the term the excess coverage |
| reasonable level...with some states requiring that | | | | should be paid either to the debtor's estate or to |
| the rates produce a 50 or 60 per cent "loss | | | | a named beneficiary. In some states creditors are |
| ratio"....ratio of incurred claims to earned | | | | limited to net decreasing life plus three or four |
| premiums....and limiting commission payments to | | | | months of payments just in case the account is in |
| creditors. | | | | arrears at the time of death. |
| While this progress helped the consumer buying | | | | Auto accident deaths create a unique insurance |
| credit life and accident and sickness insurance | | | | situation where credit life is involved because the |
| creditors soon realized that it was easy to | | | | casualty insurance on the vehicle will often pay off |
| develop new products which were not regulated | | | | the car note leaving the credit life insurance to be |
| under the NAIC model law...products such as | | | | paid directly to the debtor's estate as a cash |
| "involuntary unemployment insurance" to protect | | | | benefit. Millions of dollars of insurance benefits |
| the consumer against job loss and "unpaid family | | | | have been lost because the surviving spouse was |
| leave" insurance to make payments in the event | | | | unaware of the double coverage on the note. |
| of a family emergency that required the debtor | | | | "Revolving account" credit life insurance usually |
| to have to leave his job temporarily. | | | | involves a monthly premium computed on the |
| Now, back to the question of whether you should | | | | basis of the outstanding balance being billed. The |
| purchase credit related insurance in connection | | | | premium covers that amount for 30 days, |
| with your next transaction, that really depends on | | | | discharging the obligation if death occurs before |
| the type of transactions, your individual | | | | the next billing date. |
| circumstances and the kind of coverage in | | | | Unfortunately, national banks that issue credit |
| question. The first question to answer before | | | | cards have developed a scam to get around the |
| deciding who to buy credit life insurance from is | | | | accusation of illegally high credit life premiums. |
| whether you need life insurance at all. The first | | | | Most of them if pressed would take the position |
| step in the answer is "Do I already have life | | | | that since they are a "national" bank the states |
| insurance in sufficient amount to cover this | | | | cannot limit their insurance premiums, even if the |
| obligation and other needs?" If so it is obvious you | | | | state also limits premiums charged by state |
| don't need any more, and the answer should be | | | | banks, but this legal position stands on shaky |
| "No". | | | | ground. |
| Life insurance is justified when (a) there are | | | | Many have issued their own policies in the form of |
| dependents to be cared for after you are gone; | | | | "debt cancellation clauses" which are amendments |
| (b) you have a moral obligation to a co-signer or | | | | to credit card agreements under which the |
| co-maker or guarantor...possibly a family | | | | account balance will be canceled if the debtor dies. |
| member...that you will pay at least your portion of | | | | But because of the risk that some state may |
| an obligation, living or dead; (c) you own property | | | | clamp down on their rate-setting practices they |
| or other assets which you want to leave to | | | | "bundle" the credit life with up to a dozen other |
| someone upon your demise, and unless this debt | | | | coverages, nearly all of which are not |
| is otherwise paid the property may have to be | | | | rate-regulated, so the charges produce a very |
| sold to pay it; (d) you are buying something | | | | large margin of profit. They won't sell credit life |
| important "on time", such as a home or an | | | | alone, but require an "all or none" purchase of the |
| expensive vehicle, and don't want it to be | | | | various components such as credit accident and |
| foreclosed or repossessed if you are not there to | | | | sickness, involuntary unemployment coverage, |
| make the payments; or (e) you and a partner | | | | unpaid family leave coverage and even such weird |
| have invested heavily in a business that depends | | | | products as "college graduation", "having a baby", |
| on both of you working, and you don't want your | | | | "retirement", "divorce" and other "life events", |
| partner to suffer a hardship if you are not there. | | | | each of which results in a month or two of |
| There may be other reasons, but the point is that | | | | benefits at the minimum payment level on the |
| you must examine your individual circumstances. | | | | account. These bundled products usually cost |
| You do NOT need life insurance if you have no | | | | upward of $1.00 per $100 per month, or twelve |
| dependents, own very little and are not leaving | | | | per cent per annum on top of the existing finance |
| anything to anyone, and there is no co-maker to | | | | charge rate. Truth in Lending does not require |
| protect, because your debts essentially die with | | | | that additional 12% to be reflected in the annual |
| you. No one will have to pay them if you don't. | | | | percentage rate, however, because the coverage |
| And if there is no money to bury or cremate | | | | is deemed "voluntary" and not part of the |
| your remains don't worry. Something will be done | | | | "finance charge". |
| with them because public health requires it. If you | | | | So the answer to the initial question is a |
| want an expensive send-off buy just enough to | | | | resounding "maybe"...depending on your individual |
| pay for the funeral and name a beneficiary with | | | | circumstances, the options available to you, and |
| instructions to use it for that purpose so your | | | | the cost of each alternative. Perhaps having read |
| creditors won't try to grab it. | | | | this you will know what questions to ask and |
| If you want to make gifts to others when you | | | | make an informed choice. |
| die, perhaps to make up for the mistreatment of | | | | |