Credit Insurance Laws

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 What Is Credit Insurance?

Credit insurance is an insurance policy that is associated with a specific loan or line of credit, such as a credit card or home loan. The purpose of credit insurance is to pay back some or all of money owed on a loan if certain stated actions occur to the borrower. For instance, death, disability, or unemployment may all serve as triggers for credit insurance to kick in and help pay off money owed on loan.

It is important to note that credit insurance differs from typical insurance policies in that it pays the lender directly, rather than issuing payments to the debtor or the debtor’s family. Although this ensures that the loan will not go into default, it also does not enable the debtor or their family to obtain any money as a result of the insurance policy.

The four most common credit insurance coverages include credit life, credit disability, involuntary unemployment, and credit property insurance, which will be discussed in more detail below.

How Much Does Credit Insurance Cost?

In short, the cost of credit insurance will vary based on the type of loan being issued, the type of insurance, the total loan amount, and the state in which the debtor lives. The price of credit insurance is typically more expensive than regular insurance premiums and other insurance policies such as life insurance or disability insurance.

For example, in the state of Wisconsin, estimates for credit life insurance on a loan for a 40-year-old borrower have an approximate annual cost of $370. In contrast, a term life insurance policy with coverage of $50,000 would only cost the same borrower $92 annually.

Further, the cost of credit insurance may fluctuate during the life of the loan. Thus, if you choose to get credit insurance, your monthly loan payment may increase because you will pay interest on the loan amount in addition to the added insurance premium. In other words, the premium is added to your total monthly statement for revolving loans, such as credit card and will vary according to the overall balance on the loan.

When Would a Person Use Credit Insurance?

It is important to first note that most borrowers do not need credit insurance if they already have other life or health insurance policies in place that would cover them in situations that may affect their ability to repay their loan.

That being said, lenders will still offer borrowers the option to buy credit insurance when applying for loans such as an auto loan or an unsecured personal loan. Importantly, a lender cannot require a borrower to purchase credit insurance for a loan or to be approved for a loan.

A person may use credit insurance as a means of providing them added security in the case of a situation occurring that may affect their ability to repay their loan. Further, credit insurance also serves as additional security. This is to ensure that a person’s credit score is not affected if they are unable to make timely payments on their loan because of something like a workplace incident that affected their ability to work.

It is important to note that credit insurance is not included in the total cost of a borrower’s loan. As such, lenders will disclose the cost of the credit insurance separately from the annual percentage rate. This means that insurance premiums could dramatically increase the annual percentage rate of the loan (“APR”) and make the loan unaffordable. In many cases, lenders offer credit insurance to consumers with low credit scores that don’t otherwise have other insurance policies that cover them in situations that would affect their ability to repay the loan.

In a 2002 Federal Trade Commission (“FTC”) Office of Consumer and Business Education report, the FTC suggested that individuals ask the following questions before choosing to purchase credit insurance:

  • 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 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, i.e., what is covered and what is not covered?
  • Is there a waiting period before the coverage becomes effective?
  • 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?

What Are the Various Types of Credit Insurance?

As mentioned above, there are various types of credit insurance that may be available to a borrower. Those credit insurances are:

  • Credit Life Insurance: This is a type of credit insurance that effectively pays off the debt a borrower owes on a credit account or mortgage in the event of their death.
    • Once again, the payment from the insurance company reflecting the payoff balance of the credit account or loan always goes to the lender, who is named as the beneficiary of the policy.
    • This means that a borrower’s family, including their spouse, biological family member, or friend, may not be named as a beneficiary to a credit life insurance policy;
  • Credit Disability Insurance: This type of credit insurance helps to secure a borrower a favorable credit rating by covering their minimum monthly credit account payment during a period of documented and qualifying medical disability;
  • Involuntary Unemployment Insurance: This type of credit insurance is similar to credit disability insurance and makes a borrower’s minimum monthly credit payments during a period of involuntary unemployment, such as unemployment as a result of a layoff or downsizing; and
  • Credit Property Insurance: This type of credit insurance cancels the debt a borrower owes on items purchased on an insured credit account if qualified disasters, such as an accident, theft, flood, or earthquake, destroy the property purchased.

What Are the Policy Qualifications and Limitations of Credit Insurance?

Since credit insurance is often sold without a comprehensive application or screening process, a borrower must make sure that they qualify for the coverage they are purchasing when the policy arrives. Oftentimes the only criteria that insurance companies use to sell a borrower credit insurance are that they have some type of credit, loan, or deposit account with the company.

Typically, a borrower must be gainfully employed in order to qualify for involuntary unemployment insurance. However, most credit insurance applications will not ask for a borrower’s employment status when selling unemployment credit insurance. On the other hand, for credit life insurance, many insurance companies impose a benefit cutoff at a specific age.

This means that so long as the borrower falls below the specified cutoff age, they will likely qualify for the credit insurance. Similar to involuntary unemployment insurance, most credit insurance applications or telemarketers do not ask for a borrower’s age when attempting to sell credit life insurance.

Is It Difficult to Cancel a Credit Insurance Policy?

Many consumers do have difficulty locating the contact information needed to cancel a credit insurance policy. This is because the insurance company that currently holds the policy is often not the original lender, store, bank, or credit card company.

It is also common for retail store accounts to be handled by a separate finance company that is unrelated to the original retail store. Thus, the borrower may be unable to recognize the credit account that the insurance is covering.

Once again, lenders cannot deny a borrower credit if they don’t purchase the optional credit insurance from them. As such, if a lender tells you that you’ll only get a loan if you buy optional credit insurance, then you should immediately report that lender to your state attorney general, your state insurance commissioner, or the FTC.

Additionally, a private credit lawyer may be employed if the person that has credit insurance believes fraudulent, deceptive, or unfair business practices were utilized in getting them to acquire credit insurance.

Do I Need an Attorney?

As can be seen, it is important to be completely clear on how each credit insurance policy works and any special claim procedures or limitation clauses that may be present in the policy prior to purchasing or retaining a credit insurance policy. An experienced, knowledgeable insurance attorney who is familiar with credit insurance policies will be able to assist you in understanding the complex provisions of such credit insurance policies in order to help you make the proper decision.

Additionally, say you are experiencing difficulty with a credit insurance company or believe that you have been treated unfairly. In that case, an attorney can also explain your legal options and whether or not you have a cause of action. Finally, an attorney will be able to initiate a civil action against any party that has harmed you, and also be able to represent you in court, as necessary.

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