Creative Consumer: Why Credit Life Insurance Is a Bad Buy

Nov. 17, 2008 — -- We all know that many Americans are deep in debt right now. I worry that may leave us vulnerable to bad products that we haven't thought about in a while.

One of those is called "credit life insurance."

Early in my career I put together a series of television stories entitled "Money Blunders," and credit life insurance was one of them. It's insurance that pays off your consumer debts if you die.

Credit life isn't normally sold by itself. Salespeople typically sneak it in when you finance a big purchase like a car because it generates hefty commissions for them. And it's overpriced.

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For the amount of money you spend on credit life insurance, you can buy far more regular life insurance. Plus, credit life coverage is severely limited. It doesn't cover pre-existing medical conditions. If you will turn 70 during the policy period, it often becomes null and void. And your family isn't named as the beneficiary -- the lender is!

When Don P. bought his first brand new car it was also a brand new financial experience. The salesman told Don the bank wouldn't give him the loan unless he bought $3,600 worth of credit life insurance!

Don was so eager to get that car that he signed the paperwork. But he was troubled. He did some research and learned it's illegal for salespeople to force you to buy credit life. Don confronted the dealership and his payments dropped from $326 a month to just $250 a month.

If you're single with no dependents, you probably don't need any kind of life insurance. If you have a family you'd like to protect, see if your regular homeowner's or life insurance policy is large enough to cover the new consumer debt.

The whole premise of credit life is faulty. Why? Most people don't realize that when you die, your heirs are not obligated to pay off your debts unless their names are on the accounts along with yours.

Do Your Homework

Scan any financing agreement carefully in search of signs of credit life and ask that it be removed.

If a salesperson insists that you buy credit life to get a loan, check with your state insurance commissioner. Some states allow lenders to require credit property insurance on loans in which you use property or possessions as collateral.

If you learn you're already paying for credit life, you can cancel it any time you want. You should receive a pro-rated refund.

How to Complain

If a salesperson tries to sneak credit life into your contract or tells you it's required, complain to your state insurance commissioner.