Credit Life Insurance A 'Rip-Off,'
Say Consumer Advocates
by Robert K. Heady
Bank Rate Monitor
Let's
say that you're about to sign a $12,000 contract for a five-year used-car
loan.
Or
you're ready to write your John Henry on documents to refinance your $50,000
mortgage balance.
Suddenly
you spot something about "credit life insurance" in the fine print.
"What's
that?" you ask.
"It's
real good protection for you and your family," says the salesman, "in
case something happens to you and you can't make the rest of the loan payments.
Credit life covers it. And it only costs four dollars a month."
You've
just been had.
Not
only will the total cost of credit life add up to hundreds of dollars over
the life of the loan, the lender -- not you -- will get the insurance payout
money in the event you die.
That's
right. You get hit by a truck and Megabank or Big America Credit Card Company
collects on the insurance. Not one dime goes to your estate, even though
you forked out all the premium payments.
Insurance
industry spokesmen argue that credit life is beneficial to certain folks,
such as the elderly. But consumer advocates, who've dug deeply into what
some observers call the "croak and choke" business, see it differently.
"Generally
it's a rip-off," warns Stephen Brobeck, executive director of Consumer
Federation of America.
In
recent years, the average payout for credit life insurance nationwide has
been only 42 cents to the beneficiary for every premium dollar collected,
versus a recommended industry standard of 60 cents, according to a study
by the U.S. Public Interest Research Group in Washington, DC. Borrowers
in areas such as New York and the District of Columbia, where the payout
is more than 80 cents on the dollar, get a better break. But residents of
Louisiana, where the figure is only 20 cents, take it on the chin.
Credit
life is "gouging" you by overcharging to the tune of more than
$400 million a year nationwide, experts say.
One
reason is that insurers offer juicy commissions to banks and other lenders,
such as credit card and mortgage companies, for each credit life policy
they sell. In many cases the credit life monthly payment may be only $4
to $8 on an 18 percent credit card, but because the insurance premium is
also charged interest on top of your loan amount, you might pay another
8 percent in hidden costs.
With
a fixed-rate mortgage, the lender typically divides up the total premium
cost into monthly payments, while with credit cards the monthly payment
amount is based on your outstanding balance.
How come
consumers are being hammered so much by credit life peddlers? Several reasons,
observes Gerald F. Richman, a West Palm Beach, FL attorney who is familiar
with the industry. "Credit life is never fully explained to the borrower.
It's not the main point of a loan transaction, and on the surface it doesn't
appear to cost very much.But,
Richman adds, "The rates are exorbitant for what you get, and the abuses
are significant because there is so much that is hidden."Toss
in the fact that you're not usually in a position to comparison-shop credit
life costs and benefits, and you've got the makings of a real rip-off.There's
a cheaper way out, advise consumer activists. You'll save money be getting
a separate, less-expensive term life policy that pays our loved ones directly.
First, though, check whether your present homeowners or life insurance policy
already provides adequate coverage. Consider adding a rider to your whole
life insurance policy to cover paying off debts if you die or become incapacitated.
The premiums probably will be far less than those on credit life or credit
disability. Other suggestions: Obtain a group policy through your workplace,
or via a membership organization such as the American Automobile Association.The
insurance guys contend that credit life isn't a rip-off, that no one should
make sweeping generalizations about such policies. They explain, for example,
that credit life premiums are not based on anyone's age or physical condition.For
that reason, an older person not wanting to saddle their heirs with, say
$5,000 worth of debts doesn't have to buy a life insurance policy in standard
$50,000 increments. They can get a credit life policy for five grand, period.
Plus, because credit life premiums are based on a group rate, oldsters don't
have to pay a higher premium. Everyone pays the same amount, regardless
of age.But
when a lender offer you credit life, it's best to say, "Thanks, but
no thanks."Editor's
Note: Robert K. Heady is the founding
publisher of Bank Rate Monitor and is the co-author of the book, The
Complete Idiot's Guide to Managing Your Money. You can e-mail at jrnl8888@aol.com.