Glen Tabor has always liked the idea of a special credit life insurance policy backing the loan on his cars. He likes the financial protection it provides even though he has other life insurance to cover his mortgage and provide his wife with living expenses for several years if he dies.
His brother-in-law didn’t add credit life to his car purchases. Recently, Tabor says, his brother-in-law died, leaving his sister stuck with a car note.
So when he bought a car late last year, Tabor spent $412 on a policy covering the 42-month $11,900 loan.
Reputation tarnished
Despite the high cost relative to some other types of life insurance, credit life insurance has its attraction for people like Tabor. And greater government attention has brought the costs of the policies under some control and at least curbed some of the grossest abuses that have given credit life a bad reputation.
Such policies are normally sold by car dealers, banks and other lenders to cover the amount of a car loan, mortgage or other credit. They work best for people with health problems, borrowers 50 or older and people who do not have general life insurance policies, experts said.
But despite government regulation, the policies are expensive, especially if the premiums are rolled into your loan balance.
“For a healthy individual, especially a healthy young individual, it’s overpriced,” says Howard Magill, actuarial officer with the Tennessee Department of Commerce and Insurance. But, he adds, “It’s not nearly as bad as it was 10 years ago.”
Still, an average of 40 percent of the amount paid for the policy goes into the commission earned by the banker, car dealer or other seller of the insurance policy, Magill says.
But the older you are, the better the deal appears because the rate does not change according to your age. For people 50 or older, the credit life rate often becomes better than they could get on a standard insurance policy whose rates do increase with age.
Donald Batchelor, a branch manager of Johnson & Higgins, an international insurance broker, also notes that a credit life policy has fewer dollars involved. A typical bank or car loan averages $7,000 to $8,000. Few insurance agents will sell you a term insurance policy for less than $50,000.
Health exceptions
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You can buy credit life regardless of your health. Most life insurance companies require you to have a physical examination before you take out a new insurance policy.
There are some pitfalls to credit life.
For one, the proceeds of the insurance policy go first to the lender to pay off your loan, which eats into your financial flexibility, says Douglas Lamb, manager of disability and flexible benefits for Agency Services Inc. of Memphis.
And the expense of such a policy grows if the lender adds the premium for the policy for the full term to the balance of your loan and applies the loan interest rate or finance charges to it.
For example, you buy a policy on a four-year, $10,000 car loan for which the premiums would total $488 over the term of the loan. If the interest rate on the loan is 10 percent, the finance charge on the premiums could add $48.80 per year to the loan-about $4 per month.
But if you pay the premium out of your pocket, you avoid those extra costs, says Magill. Tabor, for example, refinanced his credit life loan with his credit union at work and pays the premium on an annual basis.
Beware of conditions
People should be careful, too, that their lender doesn’t pressure them into buying insurance as a condition for getting the loan, says Magill.
A lender can require you to have insurance backup to a loan, but “you have to be given two or three options,” Magill says. You may be offered the lender’s insurance, policies from other companies or be given the opportunity to assign an amount from your existing life insurance policy to cover the loan amount.
If you buy credit life insurance, get a copy of the policy and a certificate of insurance, which says who is insured, for how long and how much you paid for it, Magill says. Having those papers makes filing a claim quicker and easier, he said.
But the best way to make sure debts are covered if you die is to put together an overall, family life insurance plan, Lamb says.
“If you’ve done any kind of life insurance work with an agent on your total family needs, it’s most likely that insurance will cover some of these short-term circumstances,” he says.