Cautions to Credit Insurance
Credit insurance is designed to bring peace of mind to people who want to protect their assets and ensure their financial security in times of involuntary income loss. However, some consumer advocates say credit insurance is overpriced at best, and is empty coverage that most people could do without.
Others cite instances where credit insurance is forced on the consumer in the course of a credit transaction. Ssome lenders have illegally coerced borrowers into buying credit life insurance by suggesting that they may not get the necessary financing without it. Another hidden disadvantage to credit insurance is that the premium has been calculated in terms of total payments and as a total amount. This lump sum has been added to the loan and interest accrues on it, making it more expensive. This is especially bad when the coverage, which is for a specific portion of the term of the loan, has worn off prior to complete payment of the loan balance. . In this case the consumer continues to pay the premium and interest without any coverage on the loan, since these costs have been leveraged into the loan itself.
Credit insurance is regulated by the individual state governments in the United States but has evaded scrutiny in the past. The burden is on the individual consumer to determine is credit insurance is useful in his or her situation and if the terms of the offered policies are reasonable. Most of the time, people do not take the time to do this.
Another cause for concern are debt cancellation contracts and debt-suspension contracts which are credit insurance substitutes. These are sold as bank products, and therefore not regulated by state insurance commissions. Debt cancellation eliminates the debt, while debt suspension simply postpones payment of the debt. In this case the debt is not cancelled and no benefits are paid. The consumer is tricked into feeling secure by the relief of cessation of payment demands made in the time of difficulty. However the debt is not only still outstanding, it is continuing to accrue interest over the time of the income cessation. This can result in an enormous balance down the road.
Most people don’t need credit insurance or a debt-cancellation/debt-suspension contract. However many buy a policy or a contract because a salesperson indulges in an illegal activity and scares them into buying it. Whenever a salesperson tells you the loan is contingent upon the purchase of insurance, report them to the consumer protection office.
by Sally.Anderson 19 years ago