Credit Insurance

If you've been thinking about making a large purchase such as a new home or car, you may be faced with a decision that involves a choice of buying credit insurance.  Here we're going to discuss the costs and benefits of purchasing credit insurance as well as the types of credit insurance available to consumers today.

What is Credit Insurance?

Credit insurance is often sold to consumers that are in the process of making a large purchase such as a new car or home.  The selling point here is that the insurance purchased will pay off any outstanding loan balance in the event that the borrower becomes disabled or passes away.

Unlike life insurance where the beneficiary may be a family member or relative, the beneficiary of credit insurance is the creditor or lending institution.  This includes traditional lenders such as banks as well as credit card companies.  The amounts repaid by the insurance can include part or all of the amounts owed.

Premiums on Credit Insurance

A credit insurance policy is normally associated with a specific line of credit or loan such as a mortgage.  Premiums are paid monthly and the amount charged each month is usually based on factors such as the amount borrowed as well as other considerations such as the age of the borrower.  Oftentimes the monthly premiums paid for credit insurance can double the effective cost to borrow the money.

Advantages of Credit Insurance

Although these premiums may be high, one of the big advantages of credit insurance is that it is normally guaranteed by the issuer.  That is to say, regardless of the insurability of a person, they can purchase such insurance if it is offered.  So a person that might otherwise not be eligible for life insurance would be eligible for credit insurance.

Disadvantages of Credit Insurance

Most of the time, it would cost the borrower less money (it's cheaper) if they were to purchase term life insurance or disability insurance instead of credit insurance.  This has a lot to do with the advantage of this type of insurance - it's guaranteed, no one is excluded due to health reasons.

Most healthy individuals, however, would be better off purchasing more traditional types of insurance such as term life insurance or a disability insurance policy.  In addition to being more cost effective than credit insurance, the policyholder does not have to worry about insuring each individual loan or line of credit.

Single Premium Credit Insurance

There is also a big disadvantage of credit insurance that is sold as a single premium policy.  That's because this type of arrangement requires the borrower to make a large, single, up-front payment at the start of the loan.  Effectively this becomes a prepaid credit insurance policy.

The big disadvantage of this type of policy has to do with fact that if the borrower were to decide to refinance their loan in a couple of years, this premium is lost or wasted.  Many individuals purchasing single premium insurance do not understand this fact and lose all the benefits of purchasing credit insurance.

Buying Credit Insurance

So how do you know if buying credit insurance is the right choice?  Lenders and creditors will normally ask you first if you're interested in purchasing credit insurance.  It can also be included as part of the monthly premium proposal.  But there are certain protections offered all consumers when it comes to this type of insurance:

• Purchasing credit insurance is normally optional - you don't have to buy it.
• It's illegal for any lender to include credit insurance in your loan without your permission or knowledge - that's considered a deceptive practice.

But before making any commitment, you should know the exact terms and conditions of the policy offered including:

• Whether or not the policy covers all of your loan or just part of the loan.
• Exclusions or limits of any benefits payments.
• Possible waiting periods before the insurance becomes effective.
• Whether or not you can cancel the insurance, and if so, the terms of the refund policy.

Also be aware that many times, credit insurance is offered to individuals on an introductory basis that can last anywhere from 30 to 90 days.

Four Types of Credit Insurance

If offered to you, credit insurance is normally sold or bundled into one of four ways:

• Credit Life Insurance - which can be used to pay off some or your entire loan in the event you pass away.
• Credit Property Insurance - which protects personal property you may have purchased from theft, accidents and even perils such as earthquakes and floods.
• Involuntary Unemployment Insurance - this type of credit insurance covers you for involuntary loss of income that may occur if you lose your job or are laid off from work.
• Credit Disability Insurance - this is sometimes referred to as accident and / or health insurance and makes payments on a loan if you have an injury or illness that prevents you from working.

Private Mortgage Insurance

Perhaps the most common type of credit insurance offered today is known as private mortgage insurance.  This type of insurance is usually provided by private mortgage insurers to help protect lenders against loss if a borrower defaults on the loan.

Lender will usually required private mortgage insurance, or PMI, if the loan to value (LTV) percentage is greater than 80%.  This is why many new home buyers attempt to save up enough money to put a down payment of 20% on a home - to avoid paying PMI.

Alternatives to Credit Insurance

We're going to finish this one up by reinforcing something we mentioned earlier - there are several very good alternatives to buying credit insurance including purchasing term life insurance and disability insurance.

Term life insurance is arguably the most efficient type of insurance you can buy.  You don't have all the added features that you'd find with universal life or whole life policies only basic insurance.  If you'd like to learn more about this type of insurance, then take a look at our article on term life insurance.

If you're worried about a disability that might prevent you from working, there are insurance companies and even employers that offer disability insurance as a benefit to their employees.  Most policies will replace anywhere from 40 - 60% of your pre or after tax income and the monthly premiums can be very reasonable.  And finally, before making such an important and long-term decision make sure you've compared quotes from several sources - before buying credit or any other type of insurance.

About the Author - Credit Insurance

Copyright © 2006 - 2007 Money-Zine.com

Debt Consolidation Resources on the Web