Credit Insurance

Credit insurance is debt cancellation coverage sold by financial institutions. Lenders, including banks, credit unions, auto dealers, and finance companies, sell credit insurance. A credit insurance policy protects lenders from non-payment of the loan amount owed under a credit agreement.

Credit insurance covers the borrower's payment obligation when a borrower fails to pay a debt. A borrower can purchase credit insurance for the benefit of the lender. Purchasing credit insurance can minimize the credit risk for the policyholder and protect the borrower's credit or family from liability.

In general, credit insurance is typically offered as an extra service by lenders to borrowers who apply for:

  • An auto loan
  • An unsecured installment loan
  • An auto equity loan
  • Subprime credit cards

Read on to learn more about credit insurance.

How Credit Insurance Works

Taking out a loan to make a large purchase is extremely common. For example, most buyers use a mortgage to purchase a home or an auto loan to buy a car. Consumers even use a credit card to charge smaller everyday items or to control cash flow.

Unforeseen circumstances can put you at risk of defaulting on your monthly payment. You can purchase credit insurance when you take out a loan or use a credit card.

In the event of your death, disability, or another triggering event, the credit insurance will make your monthly payments. The credit insurance coverage will provide payments directly to the creditor on your behalf.

Credit insurance policies usually include a deductible by which the debtor bears the responsibility for an initially agreed-upon amount. When the amount owed exceeds this amount, the insurer's liability attaches.

How Credit Insurance Is Initiated

Credit insurance can be initiated in various ways. Sometimes, a loan proposal includes an offer for credit insurance. Credit insurance is always voluntary. Under no circumstances can you be forced to purchase it from a lender.

The Federal Trade Commission (FTC) has stated that it's illegal for a lender to deceptively include insurance products in your loan without your knowledge or permission. You must explicitly agree to the credit terms.

Credit insurance may be a part of your credit management strategy to avoid bad debts. Credit insurance can offer you peace of mind. It can even help prevent insolvency in certain situations.

Your financial position or other insurance products may make credit insurance unnecessary for you. The premiums may not justify the possible payout.

For example, the same sort of protections offered by credit insurance can also be provided through the following:

When shopping for insurance, consider exploring those sorts of policies as well.

Types of Credit Insurance

The types of credit insurance that will be right for you depend on the risk you are trying to guard against. The most common types of credit insurance are:

  • Credit life insurance: This coverage repays some or all of your loan if you die.
  • Credit disability insurance: This policy will pay if you can't work due to an illness or injury.
  • Involuntary unemployment insurance: If you experience an involuntary loss of income through no fault of your own, such as if you are laid off, this policy will make your loan payments until you are back on your feet.
  • Credit property insurance: This type of insurance protects any personal property used to secure a loan if it is destroyed by an event such as theft, accident, or natural disaster.

Types of Credit Insurance Premiums

Your credit insurance premium will depend on various factors. These factors include the following:

  • Loan amount
  • Credit limit
  • Type of credit
  • Type of policy

Borrowers can pay using the single premium or the monthly outstanding balance method.

Single Premium Method

With this method, the financial institution calculates your premium when you take out your loan. The financial institution or insurer adds the premium to the total loan amount.

You become responsible for the entire premium when you purchase the policy. The monthly loan payment breakdown will include the following:

  • A portion of the initial loan
  • A portion of the insurance premium
  • The interest charge for the month

Monthly Outstanding Balance Method

This payment method is typically used for credit cards, revolving home equity loans, or similar debts where the debt may increase over time.

The monthly outstanding balance method addresses variable accounts receivable. In such cases, the premium for that particular month's debt is based on either the end-of-the-month or an average daily balance.

Get Legal Help With Credit Insurance

If you're considering a major purchase and want credit insurance protection, there are many issues to consider. Carefully consider whether you need credit insurance in the first place. Sometimes, the terms can be more favorable to the lender, offering you little benefit given your circumstances.

Sometimes, disputes can arise with your insurance company about the amount of your premium or the extent of your coverage. If you are in a dispute with your insurance company or have legal questions about credit insurance, you should talk to a lawyer about your options. FindLaw can help you find an experienced insurance attorney in your area.

Was this helpful?

Can I Solve This on My Own or Do I Need an Attorney?

  • Consumer legal issues typically need an attorney's support
  • You can hire an attorney to enforce your rights for safe products, fair transactions, and legal credit, banking and related financial matters

Legal cases for identify theft, scams, or the Equal Credit Opportunity Act can be complicated and slow. An attorney can offer tailored advice and help prevent common mistakes.

Find a local attorney