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ISSUED 12/22/2008 FOR IMMEDIATE RELEASE

CREDIT INSURANCE: A SAFETY NET OR A WASTE OF MONEY?

By Eric Dinallo
Superintendent of the New York State Insurance Department

Many consumers use credit more than ever during the holidays. Companies offering credit insurance, including credit card companies, understand this and use the holidays to heavily promote the sale of credit insurance.

Consumers considering credit insurance should fully understand the terms of a credit insurance policy before signing any documents. Consumers should always feel free to contact the Insurance Department if an insurer is unable or unwilling to answer questions to their satisfaction.

Credit insurance is sold in connection with a credit obligation or loan. If a specific situation, such as a job loss, prevents the consumer from repaying, the credit insurance policy protects the lender by making payments on the consumer’s behalf. There are different types of credit insurance:

  • Credit life insurance pays all or some of a loan if the consumer dies.

  • Credit disability insurance, also called credit accident and health insurance, ensures payments to a creditor on a loan if the consumer becomes disabled.

  • Credit involuntary unemployment insurance pays a limited number of monthly loan payments if the consumer loses a job due to a layoff or similar event.

Credit insurance is typically sold to consumers at the point-of-sale. As an example, an appliance store will often facilitate the sale of a credit insurance policy by offering it to consumers when they buy major appliances.

How much does it cost and how are consumers charged?

The cost of credit insurance is typically determined by the type of policy, the amount of the debt and the kind of credit obtained. In some cases, the insurance premium is added to the loan, increasing the consumer’s monthly loan payment. With credit cards and revolving home equity loans where the amount of debt may increase over time and vary from month to month, the amount of the premium is based on the outstanding balance. Failing to make monthly payments could lead to cancellation of the policy.

Things to consider

Consumers need to evaluate whether the cost of credit insurance is beneficial to their overall needs and fits into their budget. They should consider these and other questions before deciding whether to buy credit insurance:

  • How much is the premium and will it be financed as part of the loan?

  • How much would the monthly payment be without credit insurance?

  • Will the insurance cover the full length and full amount of the loan?

  • Does the policy spell out exactly what's covered and what's not, and is there a waiting period before coverage begins?

  • Can the policy be cancelled? If so, what kind of refund is available, or are there penalties?

Consumers should also weigh the pros and cons of credit insurance against the merits of a traditional term life insurance or disability insurance policy.

Full disclosure

It is unlawful for a lender to include credit insurance in a loan without the consumer’s permission. Before signing any loan papers, consumers should ask whether the loan includes charges for voluntary credit insurance. Lenders cannot deny credit or a loan if the consumer does not buy optional credit insurance.

Consumers should ask their insurer to provide all details in writing before agreeing to buy a credit insurance policy. They should not sign anything unless all of their questions are fully answered.

Is It Worth the Cost?

Whether or not credit insurance is worth buying is a decision that only a consumer can make after carefully considering his or her personal situation and then considering the potential benefits and costs involved.

Consumers with questions about credit insurance are urged to contact the New York State Insurance Department between 9 a.m. and 4:30 p.m., Monday through Friday toll-free at 800-342-3736, or review insurance information on the Department’s website, www.ins.state.ny.us.

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