If you’ve ever taken a loan of any sort in the past – including a credit card – then you’re probably familiar with the concept of credit life insurance. Many, perhaps most, lenders encourage adding credit life insurance to loan arrangements. But is credit life insurance really something that you should buy?
Credit Life Insurance Isn’t Required – Just Encouraged
Generally speaking, under federal law, a lender is prohibited from requiring credit life insurance as part of a loan arrangement. But the law does not prohibit them from offering you the coverage.
That’s where the situation gets a little sticky.
A lender can push you to take credit life insurance – just short of the point of blatantly indicating that it’s required as part of the loan approval. Many lenders will push the envelope and do just that. A lender can imply that credit life insurance is required without ever saying as much, and certainly without presenting any kind of disclosures saying that it is.
For this reason, many borrowers will take credit life insurance under the mistaken assumption that they are required to do so. But you aren’t, so you have to be aware of how it’s presented and know your rights – which means your right to refuse the coverage.
You should also be aware that many lenders use deceptive tactics in order to get you to take credit life insurance. Some will include it in the paperwork and hope that you never notice. Others will follow up after the fact, by using telemarketers to approach you with an offer. Understand that your verbal approval to a telephone solicitation can be all that’s needed in order to have the coverage added to your loan arrangement.
And they can get you to give that verbal approval by selling you on the idea that your debt will be paid in full upon your death, and will not be a burden to your family.
If that’s the line that is used, then there’s something else that you need to be aware of…
Credit Life Insurance Protects the Lender More than it Does You
While it is true that credit life insurance will pay off your loan in the event of your death, sparing your family the burden, that’s only a secondary benefit. The primary benefit is to protect the lender.
Credit life insurance policies name the lender as the beneficiary in the event of your death. The complication is that it will not be at all easy to end the policy in the event that you change your mind. Though you will be paying for the life insurance coverage, the lender will be both the owner and the beneficiary of the policy, and it will be issued by an insurance company that you have no relationship with. There’ll be little incentive for the lender to permit cancellation of such a policy after the fact.
Credit Life Insurance is Usually More Expensive than an Equivalent Term Life Insurance Policy
There are two reasons why credit life insurance is more expensive than an equivalent term life insurance policy:
- Life insurance costs more on a per thousand basis for smaller policies than it does for large ones. Since credit life insurance policies are typically issued for relatively small amounts, they’ll be much more expensive than term life insurance.
- At least some of the premium being paid for credit life insurance will be a commission back to the lender for originating the policy.
Once again, good for the lender – but not for you.
Credit Life Insurance is an Extra Revenue Stream For the Lender
We just covered this point in #2 above, but it’s worth spending some extra time on.
If you understand that a lender has a financial benefit – additional income – in getting you to take a credit life insurance policy, then you can fully understand why they will make every effort to get you to sign up for one.
Best of all, the income that they earn on credit life insurance premiums is a completely passive source of income. The lender does nothing to earn the income once you signed up, and the revenue keeps rolling in on a monthly basis until your loan is paid in full, or your revolving loan arrangement is terminated.
One Large Term Life Policy Should Keep You Covered
If you have several loans and credit cards, there’s more than a slight chance that you have multiple small credit life insurance policies in force. Each of these policies is more expensive than an equivalent slice of a large term insurance policy.
If you are concerned with making sure that your debts will be paid upon your death, it will be better to have a single large term life insurance policy, then a battery of smaller policies each dedicated to specific loan.
For example, rather than having a $15,000 policy for Car Loan 1, $10,000 for Car Loan 2, $7,000 for Credit Card A, $8,000 for Credit Card B, $10,000 for a random installment loan, and a $150,000 mortgage cancellation policy, it would be cheaper and more efficient to have a single $200,000 term policy that covers them all.
You can do that by setting up a single dedicated term life insurance policy, or you can add more coverage to an existing policy, or create a single large term policy that covers all of your life insurance needs in one plan. You will see substantial savings as a result of doing such an insurance consolidation.
Call our office and give us a chance to help you do exactly that. Saving people money on life insurance is what we do!
