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Credit insurance worth it?
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February 16, 1999: 2:02 p.m. ET
Experts say credit card and mortgage life insurance may not be worth the price
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NEW YORK - Buy something on credit these days and you're almost certain to receive an offer of credit insurance. Sometimes the solicitations come from telemarketers. Other times, it's a direct mail piece which begs you to: "Safeguard your family's security." Often, it's a combination of several approaches.
Credit insurance is usually a package of life, disability and unemployment coverage designed to pay off the minimum monthly payment should the borrower lose their job, die or become disabled.
While the idea might make sense initially, experts say credit insurance often isn't worth the money. And better deals can generally be found elsewhere.
With fixed loans like a mortgage, a single credit insurance premium is divided among monthly payments. But the structure of protection for a revolving credit card debt is different. It's calculated each month to cover only the debt that existed at the last cyclical billing.
Costs add up
"The typical rate is 75 cents for each $100 of loan coverage per month," explained Jim Hunt, a New Hampshire life insurance actuary. "So your credit card charges a 15 percent finance charge and the insurance adds another 8 or 9 percent. That's not an insignificant amount of money."
Basically, credit insurance is a product sold to banks and retailers at a group rate. They issue it to consumers at what experts feel is a very high price.
"It's a small industry that sells protection in the event you can't make your payments," said Stephen Brobeck, a chartered financial analyst. "Essentially, you buy it and it's very expensive; it's not a good deal."
At the typical rate, the premium on a monthly balance of $4,000 would cost $30. Over the course of a year, this security would cost about $360. Critics argue a life insurance policy would cost less and pay more in benefits.
State regulations blamed
Because state insurance commissioners set the maximum rates on credit insurance, lenders say the high prices are not their fault. State regulation also means the costs vary nationwide.
"The states unevenly regulate it, so it's a better buy in New York by far than it is in Louisiana, where it's a terrible buy," said Hunt. "But if you're 60 and in poor health, it's a good buy anywhere. If you're under 40, it's a bad buy."
There is no way to comparison shop with credit insurance. You either buy from the company lending the money or credit or you don't buy at all. So be sure to scrutinize the fine print for things like premium rates, payout maximums and restrictions. Many cap the payoff at $10,000.
A 1998 Installment Credit Survey Report by the American Banker's Association showed fewer than 22 percent of borrowers buy credit life insurance, and fewer than 4 percent buy unemployment insurance. (Exact numbers are not tabulated by the association.)
Used by the underinsured
"The people who tend to use it are people who earn a lower income and don't have other insurance," said Runkle of the Consumer Credit Insurance Association. "It tends to be more attractive to minorities and the less educated. This may be the group who has less contact with individual (insurance) agents."
Even consumer advocates admit credit insurance may be a type of "last-resort" protection for the right person, like the older smoker in poor health. Here is what a typical credit card insurance policy offers:
- Voluntary enrollment
- Cancellation at any time
- Rates regulated by the state insurance commissioner, regardless of age, gender or health
- Premium fee calculated on current monthly balance
- Benefit of minimum monthly payment if borrower is disabled or unemployed
- Full payment benefit in the event of death or dismemberment, with a cap set typically at $10,000
- Personal credit rating maintained in good order in the event of disability or unemployment
It's hard to miss the boat on this one. There is almost always another chance to buy -- probably on the next credit card bill. But remember to review the offer carefully. It may be more trouble than it's worth. 
--by Bank Rate Monitor for CNNfn
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