By John Voket
I recently came across some great advice from Maryland Attorney General Douglas F. Gansler regarding costly and unneeded insurance being marketed to consumers who are borrowing money or making a purchase on credit. According to Gansler, this ”credit insurance” is notorious for being one of the most overpriced insurance products.
Credit insurance may be sold under the pretense of being mandatory, but rarely is. For instance, in Maryland and other states lenders cannot require the purchase of most types of credit insurance.
Lenders may require credit property insurance on loans secured by a piece of property, or a destructible possession, but a consumer is allowed to choose the insurance company.
There are three types of credit insurance:
1. Credit Life Insurance, which pays off an outstanding loan if a consumer dies;
2. Credit Disability Insurance, which makes payments on a loan if a consumer is disabled; and
3. Credit Involuntary Unemployment Benefit Insurance, which makes payments on a loan if a consumer is involuntarily unemployed.
If consumers wish to purchase insurance, Gansler says they should consider a few alternatives, including checking to see if their current homeowner’s or life insurance policy provides adequate coverage.
As with other forms of insurance, it is important for the consumer to check the policy closely before agreeing to its terms. Some good questions to ask include the length of any waiting period, limitations, cancellation terms, coverage length, financing and comparability to other similar policies.
U.S. Dept. of the Treasury reports that the cost of the Credit Life Insurance is often added to the principal amount of a loan. And lenders must disclose the terms and costs of obtaining the insurance since it can affect the terms of the loan.
Some policies may also combine Credit Life and Credit Disability (also called accident and health insurance) into one policy—and may contain provisions for cancellation of the policy. A bank cannot force you to buy credit insurance, but once you sign up for credit insurance on your loan, the cost of your coverage becomes part of your contract with the bank.
Then there is private mortgage insurance or PMI. If the borrower stops paying the loan, PMI is a policy that protects the lender by paying the costs of foreclosing on a house.
PMI usually is required if the down payment is less than 20 percent of the sale price, and while PMI protects the lender, it is typically paid monthly by you, the borrower.