What is credit insurance?

Credit insurance is an insurance policy associated with a specific loan or line of credit which pays back some or all of any money owed should certain things happen to the borrower, such as death, disability, or unemployment.

The costs (called a "premium") for this are usually charged monthly, depending on the balance owed, and depending on the usage of the loan or line, could almost double the cost of it (on the opposite end of the spectrum, clever usage could avoid having to pay almost any premium at all).

The sale of credit insurance is controversial because it is almost always cheaper for an individual to forgo credit insurance, and instead have a term life insurance or disability insurance policy to cover the credit balance. The reason is that credit insurance is guaranteed issue, no matter if a person would otherwise be insurable or not. So the rates offered must reflect this, and be worse than if a healthy or otherwise insurable person were to purchase coverage on their own.

In addition, there is an even more controversial practice (called single premium credit insurance), usually associated with the sub prime lending industry, of charging the premium only one time at the beginning of the loan. For example, charging $5,000 dollars at the time of a mortgage refinance, which is usually financed (added to the total loan amount) as part of the loan. This is considered very bad by critics, since doing this is only cheaper if one is sure that one is going to stay with the loan forever and not refinance. Critics contend most people do not realize this and lose money by refinancing once again, thereby losing the benefits of the credit insurance.

Should I really need a credit insurance?
Before deciding to buy credit insurance from a lender, think about your needs, your options, and the rates you're going to pay. You may decide you don't need credit insurance. If you do, credit insurance can be an expensive form of insurance. For example, it may be less expensive and more practical for you to get life insurance than credit insurance. Before deciding to buy credit insurance, you should ask:

• How much is the premium?

• Will the premium be financed as part of the loan? If so, it will increase your loan amount and you'll pay additional interest, and more for points (if points are on your loan).

• Can you pay monthly instead of financing the entire premium as part of your loan?

• How much lower would your monthly loan payment be without the credit insurance?

• Will the insurance cover the full length of your loan and the full loan amount?

• What are the limits and exclusions on payment of benefits - that is spell out exactly what's covered and what's not.

• Is there a waiting period before the coverage becomes effective?

• If you have a co-borrower, what coverage does he or she have and at what cost?

• Can you cancel the insurance? If so, what kind of refund is available?

Note: All the above information are subject to change without notices.