Wise Choices - Oregon Credit Insurance

Credit is a way of life for most Americans. But if you get sick and can't work, how will you make your payments? Will your family be able to make payments on your debts if you die?

Consumers spend more than $2 billion each year on life insurance to cover items bought on credit or to cover credit card balances. However, many people have enough assets and life or disability insurance to cover their debts, yet purchase credit insurance anyway.

Often, consumers buy credit insurance without realizing what they getting. Some believe they had to purchase credit insurance to get the loan.

Lenders can't require you to purchase credit insurance.

If you are offered credit insurance when making a credit purchase or taking out a loan, you need to know the facts. Make the decision that's right for you. If you decide to buy coverage, it's important to understand exactly what you are getting.

What is credit insurance?

Credit insurance protects lenders if you can't make your payments because of injury, illness, or death. It also can protect you and your family from serious financial difficulties.

Most often, credit insurance is bought when you set up installment purchases of major items or establish store charge accounts. Credit insurance is sold by banks, finance companies, auto dealers, and other lenders on behalf of licensed insurance companies.

There are three types of credit insurance:

• Credit life insurance. Term insurance that pays off your installment loan if you die.
• Credit health insurance. Disability insurance that makes payments on the loan if you become ill or are injured and can't work.
• Credit involuntary unemployment insurance. Insurance that makes loan payments if you are laid off or are fired from your job (unless you are fired for intentional misconduct).

How do these policies work?

Credit insurance policies cover the balance owed on the loan. You may pay a monthly premium for the coverage (usually included as part of the loan payment), or you may pay a single premium added to the total loan. You can buy up to 10 years of credit insurance on a loan.

What should I watch out for?

The most common issue with credit insurance is confusion about whether it is required by the lender. Because lenders profit from credit insurance sales, some may pressure borrowers to purchase it.

Some lenders ask borrowers to purchase credit insurance without telling them the coverage is optional. Sometimes buyers are led to believe the coverage is a condition of obtaining credit.

Do I have to buy it?

No. Lenders can't deny you credit if you refuse to buy the credit insurance they offer. But a lender can require you to protect the loan in other ways, such as using your existing life or disability insurance policies or personal property as collateral. If so, the lender must inform you of this requirement in writing. Remember: If you don't like the terms the lender is offering, you may be able to go to another lender to finance your purchase.

How do I know if I need credit insurance?

To decide what's best for you, ask yourself these questions:

• Do I have enough life insurance, disability insurance, or other assets to cover my debts?
• Would it be cheaper to buy life insurance than credit insurance? Buying life insurance or increasing the coverage on an existing policy probably costs less and has greater long-term benefits than purchasing separate credit insurance. However, since the cost of term life insurance can increase as you age, credit insurance may be a better bargain for some older consumers.
• Am I getting a good value? Once you decide to buy credit insurance and choose the coverage you need, there are steps you can take to be sure you get your money's worth. Read the policy. Ask questions about everything you don't understand, including:
  • Does it cover the outstanding balance of the loan and the entire length of the loan?
  • How much is the premium?
  • What is and isn't covered? What are the limitations, and types of disabilities covered?
  • If I lose my job or become disabled, is there a waiting period before the coverage is in effect?
  • If I have a co-borrower, what coverage does he or she have?
  • Would it be smarter to increase my life insurance?

Here's an example: A 30-year-old woman in good health is taking out a $5,000, five-year loan. She can buy credit life insurance for the five-year life of the loan, paying a single premium of $112.50, to be added to her total loan amount. If she dies, the insurance will cover only the outstanding balance of the loan.

Life insurance, however, pays the entire amount of the policy value. If she already has an individual term life insurance policy for $50,000 and increases it by $5,000, the additional cost would total less than $15 for the five-year loan period.

If she buys a new term life insurance policy, the cost will be about $500 for five years of coverage. This premium will offer between $50,000 and $100,000 in coverage, depending on the company she buys from ($50,000 is the smallest amount of coverage usually available). Term life, while more expensive than credit life, provides 10 to 20 times the amount of coverage.

Remember: The cost of term life insurance varies based on your age and health. It's important that you consider your own circumstances before making your decision. Also remember that term life insurance pays your estate the total amount of your coverage. Credit life insurance pays the lender only the outstanding balance of the loan.

Can I choose my insurance company?

Unlike other forms of insurance, you can't comparison shop for credit insurance. The lender decides who the credit insurance company will be and the types of coverage available for its loans. Often the only way to choose another credit insurance company is to choose another lender.

Insurance division recommendations:

• If you have enough insurance or assets to cover your debts, it probably isn't wise to purchase credit insurance.
• If you discover you already have credit insurance you don't need on an installment loan, ask the lender to cancel your coverage. Often, the lender will do so, and reduce your payments accordingly.
• If you don't have enough insurance or your financial situation is unstable, credit insurance may be an important -- even necessary -- protection for you. If you purchase coverage, know what you're buying and how much you're paying for it.
• Know your rights. An insurance policy is a legal contract. It should be written so your rights and responsibilities, as well as those of the insurance company, are clear. Read the policy and understand it before you sign. If you have questions, contact your agent or the company and get the answers you need.
• Keep your policy in a safe place and know the name of your insurer.
• Check out the insurer before buying a credit or other insurance policy. We can tell you about the company's stability, it's complaint record, and whether it is licensed to do business in the state. If you have concerns about a lender offering you credit insurance or if you want more information on your choices and rights as a consumer, contact the Insurance Division.

Remember, lenders can't require you to purchase credit insurance.

For your protection:

The Oregon Insurance Division protects you in buying insurance. We offer a number of consumer guides that outline your specific rights and responsibilities under Oregon's insurance laws.

We also publish premium comparison reports for some lines of insurance, and a report listing the number of consumer complaints received by insurance companies operating in Oregon.

If you need help with any insurance problem, don't understand your policy, have questions about an insurance agent, or want information about the stability of an insurance company, call the Insurance Division in Salem at (503) 947-7984.

Wise Choices is an educational series from the Oregon Department of Consumer & Business Services. It's intended to inform Oregonians about their rights in insurance, investments and banking, occupational safety and health, building codes, and workers' compensation.

The information contained in Wise Choices is in the public domain, and may be reprinted without permission.

To receive more information on DCBS programs to protect and educate consumers, please write to: DCBS Wise Choices, PO Box 14480, Salem, OR 97309-0405.