Credit Insurance When You Buy a Car
For most of us, buying a car is the second largest financial transaction we’ll make, next to buying a home. And we’re likely to get loans to finance our car purchase. In the fourth quarter of 2014, 84 percent of new cars purchased were financed, according to Experian Automotive.
If you’re financing your car purchase through a dealership, it’s also likely that the finance and insurance manager will offer you warranty and insurance products, such as an extended warranty, gap insurance or tire-and-wheel protection. The F&I manager might also offer credit protection, which is meant to cover your car payments should you be unable to pay them yourself because of layoff, injury, illness or death.
The most venerable of these products, with an almost 100-year history, is credit insurance. Consumer groups have long been leery of credit insurance products, which are offered not just for cars, but also for credit cards and other consumer loans. Often, the consumer groups contend, the products are expensive and unnecessary. Further, there have been instances of lenders forcing the credit insurance on consumers.
“It’s often very expensive when you compare it to the benefits,” says Chris Kukla, senior vice president with the Center for Responsible Lending, a nonpartisan, nonprofit organization focusing on consumer lending, based in Durham, North Carolina. Further, he says, the credit insurance policies are “riddled with exclusions.”
Payout rates (the premium dollars paid compared with the amount paid out in claims) are typically low. That’s because the money is going to commissions, he says.
There are some decent providers of credit insurance, such as credit unions, Kukla says, but it’s tough for consumers to know which products are worthwhile and which ones are rip-offs. To protect themselves, potential buyers should look for coverage they can afford that specifically addresses their financial concerns and which comes from a reputable insurer. The insurance department in your state is the place to check in order to see that the company is licensed and legitimate, says automotive expert Lauren Fix.
The three most common types of credit insurance coverage are:
Credit life: This pays off all or some of your loan if you die during the time you’re covered.
Credit disability: Pays on the loan if you become ill or injured and can’t work during the time you’re covered. It’s also sometimes called credit accident and health insurance.
Credit involuntary unemployment: Pays a specified number of monthly loan payments if you lose your job through no fault of your own, such as in a layoff, during the coverage term. It’s also known as “involuntary loss of income” insurance.
None of these coverages is required with a car loan. You can’t be denied credit if you say no to a credit insurance offer, Kukla says.
Payment Protection: A Newer Product
A more recent type of credit protection is called debt protection, which might also go by such names as debt cancellation, debt suspension or payment protection. Federal law allows national banks, most state-chartered banks and credit unions to offer this benefit without involving an insurer. The bank or credit union fills that role.