Credit Insurance: Is It for You?
The next time you apply for a mortgage or personal
loan, you may be asked if you want to buy credit insurance, or it
might already be included in your loan proposal. Credit insurance
protects the loan on the chance that you can't make your payments.
Credit insurance usually is optional, which means you don't have to
purchase it from the lender. In fact, the Federal Trade Commission
(FTC), the nation's consumer protection agency, says it's against
the law for a lender to deceptively include credit insurance (or
other optional products) in your loan without your knowledge or
There are four main varieties of credit insurance:
Credit life insurance pays off all or some of your loan if
you die. Credit disability insurance, also known as accident
and health insurance, makes payments on the loan if you become ill
or injured and can't work. Involuntary unemployment insurance,
also known as involuntary loss of income, makes your loan payments
if you lose your job due to no fault of your own, such as a layoff.
Credit property insurance protects personal property used to
secure the loan if destroyed by events like theft, accident or
Before deciding to buy credit insurance from a lender, think about
your needs, your options, and the rates you're going to pay. You may
decide you don't need credit insurance. If you do, credit insurance
can be an expensive form of insurance. For example, it may be less
expensive and more practical for you to get life insurance than
credit insurance. Before deciding to buy credit insurance, you
How much is the premium?
Will the premium be financed as part of the loan?
If so, it will increase your loan amount and you'll pay additional
interest, and more for points (if points are on your loan).
Can you pay monthly instead of financing the
entire premium as part of your loan?
How much lower would your monthly loan payment be
without the credit insurance?
Will the insurance cover the full length of your
loan and the full loan amount?
What are the limits and exclusions on payment of
benefits - that is, spell out exactly what's covered and what's
Is there a waiting period before the coverage
If you have a co-borrower, what coverage does he
or she have and at what cost?
Can you cancel the insurance? If so, what kind of
refund is available?
Before you sign any loan papers, ask the lender
whether the loan includes any charges for voluntary credit
insurance. If you don't want credit insurance, tell the lender. If
the lender still pressures you to buy insurance, find another
lender. And review your loan papers carefully to be sure they have
been drawn up correctly. Lenders can't deny you credit if you don't
buy optional credit insurance - and if you don't buy it directly from them.
If a lender tells you that you'll only get the loan
if you buy the optional credit insurance, report the lender to your state attorney general,
your state insurance commissioner or the FTC. Consumers should ask
these same questions about other extra products offered with their
loan, such as auto or shopping clubs, home or auto security plans,
and debt cancellation products.
The FTC works for the consumer to
prevent fraudulent, deceptive and unfair business practices in the
marketplace and to provide information to help consumers spot, stop and
avoid them. To file a
complaint or to get free information
on consumer issues, visit
call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The
FTC enters Internet, telemarketing, identity theft and other fraud-related
Consumer Sentinel, a
secure, online database available to hundreds of civil and criminal law
enforcement agencies in the U.S. and abroad.
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