When consumers borrow money for almost any purpose, they are often offered the option of purchasing credit insurance.
That's a policy that insured repayment of the loan, even if the borrower dies, becomes disabled, or loses their income. Maryland Attorney General Douglas Gansler says it's notorious for being one of the most overpriced insurance products and consumers should go into any purchase with their eyes wide open.
“Consumers need to know what they are buying and how much it will cost before they commit to paying for credit insurance,” Gansler said. “Before you sign any contract, understand all the terms and costs.”
Gansler said credit insurance may be sold under the pretense of being mandatory, but rarely is. In Maryland, for example, lenders cannot require the purchase of most types of credit insurance. Lenders can require credit property insurance on loans secured by a piece of property, or a destructible possession, but a consumer is allowed to choose the insurance company.
There are three types of credit insurance:
- Credit Life Insurance, which pays off an outstanding loan if a consumer dies;
- Credit Disability Insurance, which makes payments on a loan if a consumer is disabled; and
- Credit Involuntary Unemployment Benefit Insurance, which makes payments on a loan if a consumer is involuntarily unemployed.
Credit insurance really only benefits the lender. While it protects the consumer from default, any benefit is paid directly to the lender.
Consider the alternatives
If consumers wish to purchase insurance, they should consider a few alternatives, Gansler says, including checking to see if their current homeowners or life insurance policy provides adequate coverage.
As with other forms of insurance, it is important for the consumer to check the policy closely before agreeing to its terms. Some good questions to ask include the length of any waiting period, limitations, cancellation terms, coverage length, financing and comparability to other similar policies.
Mortgage insurance is a type of credit insurance that is often required on some home loans, to protect the lender in the case of default. Mortgage insurance is usually required on loans where the consumer is borrowing more than 80 percent of the purchase price.