Credit-Related Life Insurance – Should You Buy It?

Credit insurance is one of the most misunderstood and fraudulently marketed products in the field of personal finance. The types of insurance sold by creditors to debtors range from the old standard credit life and accident and sickness insurance to such worthless contracts as “life events” which will be explained below. Almost all of these policies are grossly overpriced and are a source of substantial profits for lenders and sales finance companies. The use of insurance as a type of security for a loan or other extension of credit is not an inherently a bad choice. Both the creditor and the debtor can benefit from removing the risk of death or disability from the equation. If the reduced risk is a factor in providing a lower interest rate, or in basic credit approval, it can be a win-win situation. The problem arises, however, when the creditor intimidates or otherwise induces a customer to purchase an insurance product not for its effect on risk but as an additional and substantial source of revenue. Normally insurance rates are set by the competitive market, which tends to hold rates down at least for the reasonably informed consumer who does some comparison shopping. Automobile insurance companies, for example, are highly competitive and the rates are seldom regulated. But in the context of an application for credit there may be no competition at the point of sale of the insurance. The creditor may be the only practicable source. The only “competition” is between insurance companies to see who can charge the highest premium and pay the highest commission to the creditor or its officers for selling the coverage. This tends to force rates up rather than down and has been dubbed “reverse competition”.