What is Credit Insurance?
Credit insurance is insurance that is sold in conjunction with a credit obligation or loan. If you lose your job or become unable to work due to some type of disability -- and these events prevent you from making the necessary loan payments -- credit insurance protects the lender from your inability to repay the loan by making payments to the lender on your behalf.
There are four main types of credit insurance:
How Much Does It Cost?
The are a number of factors - including the amount of the loan or debt, the type of credit and the type of policy - that might impact the cost of a credit insurance policy. Companies will generally charge premiums by either using a single premium method or a monthly outstanding balance method.
Single Premium Method
The insurance premium is calculated at the time of the loan, and often added to the amount of the loan. This means that the borrower is responsible for the entire premium at the time the policy is purchased. In turn, the monthly loan payment would increase because the original loan amount now includes both the original loan amount and the insurance premium.
Monthly Outstanding Balance (MOB)
This method is generally used for credit cards, revolving home equity loans or similar debts. There are two subcategories to consider for this type of charge:
How Does It Pay Out?
The payment of the insurance claim will vary, depending on the situation:
It is against the law for a lender to deceptively include credit insurance in your loan without your knowledge or permission. Before you sign any loan papers, ask the lender whether the loan includes any charges for voluntary credit insurance.
Is Credit Insurance Required for a Loan?
With the exception of private mortgage insurance (PMI), lenders cannot deny you credit if you do not buy optional credit insurance. PMI is extra insurance that lenders require from most homebuyers with less than a 20 percent down payment on the purchase of a home.
If a lender tells you that you will only get the loan if you buy the optional credit insurance, report the lender to your state insurance department and find another lender. Go to www.naic.org/state_web_map.htm for a link to your state insurance department's Web site.
Things to Consider
Before deciding to buy credit insurance from a lender, think about your needs, your options and the rates you are able to pay.
Consider these questions before signing the application:
Watch for aggressive sales tactics and make sure you understand all of the documents you sign. If you have any questions about the coverage or the company selling the coverage, contact your state insurance department.
Before purchasing credit insurance, check to see what a traditional term life insurance or disability insurance policy would cost. You might decide it is less expensive to purchase traditional life insurance or disability insurance rather than purchasing credit insurance.
Stop. Call. Confirm.
If you are unsure about the insurance company you are dealing with, STOP before signing any paperwork or writing a check; CALL your state insurance department - easily reached by phone; and CONFIRM the company or agent offering insurance is legitimate and licensed in the state. Find contact details for your state insurance department at www.naic.org/state_web_map.htm.
For more information about auto, home, life and health insurance options, as well as tips for choosing the coverage that is right for you and your family, visit www.insureUonline.org.
The National Association of Insurance Commissioners Headquartered in Kansas City, Mo., the National Association of Insurance Commissioners (NAIC) is a voluntary organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and five U.S. territories. The NAIC's overriding objective is to assist state insurance regulators in protecting consumers and helping maintain the financial stability of the insurance industry by offering financial, actuarial, legal, computer, research, market conduct and economic expertise. Formed in 1871, the NAIC is the oldest association of state officials. For more than 135 years, state-based insurance supervision has served the needs of consumers, industry and the business of insurance at-large by ensuring hands-on, frontline protection for consumers, while providing insurers the uniform platforms and coordinated systems they need to compete effectively in an ever-changing marketplace. For more consumer information, visit InsureUonline.org.
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