Credit Life Insurance: You Don't Need It

Occasionally, Consumerism Commentary readers send in questions or stories they'd like to share with a wide audience. These questions and stories come to me through email, via Facebook, and through this website. Recently, a new reader who discovered Consumerism Commentary due to my multi-year coverage of Bank of America (primarily the articles pertaining to the overdraft fee class-action lawsuit), wanted to share a cautionary tale about the same bank.

It's no surprise that bankers are salespeople. Some are encouraged to sell financial products with compensation like bonuses or commissions, and they are not required to sell products that are in their customers' best interests. Salespeople in any field are there to make money for their companies - that's it. At the same time, consumers look to certain types of salespeople as experts, relying on these professionals to help them navigate complicated products.

I've never opened a home equity loan with a bank. I don't have a home or a mortgage, so I don't have personal experience with the type of product discussed in this article. But I took this opportunity to research the subject. There might be financial professionals, planners or advisers who are required by their certification to give advice with their clients' best interests in mind, who might be able to elucidate the issue even further.

I'll share the story in a future article because I wanted to ensure I was more familiar with the particular product, credit life insurance, before addressing the general concern she had. The concern is not with the product itself but with how Bank of America charged her for the coverage, and I'll explain that in detail in a future article.

I say the following with no judgment whatsoever about anyone who has knowingly chosen, while understanding what a credit life insurance policy does and does not cover.

First, credit life insurance is a type of insurance policy that banks will try to sell - and they will try hard to sell thanks to big commissions for these products - when a customer takes out a loan or opens a home equity loan. It's an add-on product, and some might even try to say that credit life insurance is required when you take out a mortgage with less than a 20 percent downpayment. Credit life insurance pays the lender if the borrower dies before having a chance to repay the loan in full.

There are off-shoots to this type of insurance product. Credit disability insurance pays the lender if disability makes it difficult for the borrower to live up to the obligations of the debt, and you might find products like credit unemployment insurance.

The premiums for a credit life insurance policy are rolled into the cost of the debt, so you hardly notice that you're paying for something separate. Your monthly payments for your home equity loan, car loan, or mortgage will include the credit life insurance premiums.

Is credit life insurance necessary? Not in almost every situation. Unless a family member's name is on the loan with yours, no survivor would be required to pay off the loan's remaining balance in the event of your death.

Credit life insurance isn't even a benefit for the consumer, it's a benefit for the lender. You're paying an extra fee for the lender's protection, not your own. Additionally, these plans often expire before the loan would be repaid in full. The reader indicated, as you will be able to see in the follow-up article, that her plan would have expired automatically when she became 66 years old. It actually expired several years prior. So, like term life insurance, you could pay into a plan for several years with a good chance of never needing to or being able to make a claim.

Here is a summary of the cons for buying credit life insurance. Keep this in mind the next time you visit a bank for a loan.

  • Credit life insurance costs more than regular life insurance for the same type of coverage.
  • The lender is the beneficiary, not your family.
  • Credit life insurance is not required for taking out a loan, and if a salesman tries to imply that it is, go somewhere else or report him or her to the authorities.

The Federal Trade Commission has issued a consumer alert about credit insurance, including credit life insurance, credit disability insurance, and other variations of insurance that protect the lender that includes the following warning:

Before you sign any loan papers, ask the lender whether the loan includes any charges for voluntary credit insurance. If you don't want credit insurance, tell the lender. If the lender still pressures you to buy insurance, find another lender. And review your loan papers carefully to be sure they have been drawn up correctly. Lenders can't deny you credit if you don't buy optional credit insurance - and if you don't buy it directly from them. If a lender tells you that you'll only get the loan if you buy the optional credit insurance, report the lender to your state attorney general, your state insurance commissioner or the FTC. Consumers should ask these same questions about other extra products offered with their loan, such as auto or shopping clubs, home or auto security plans, and debt cancellation products.