By Anuradha Raghunathan
The Dallas Morning News
Anytime you buy something on credit - whether a car or a couch or a computer - you can expect to be offered an add-on called credit insurance.
For seemingly modest premiums, credit insurance will pay off your loan if you die, or it may make some payments if you can't work due to a disability or a job loss.
While this may seem like a smart way to protect yourself or your family from a loan default, consumer advocates say the numbers usually don't work in your favor. And they say credit insurance is often overpriced, aggressively sold and misunderstood.
In some recent high-profile cases, the Federal Trade Commission has cracked down on deceptive sales practices and ordered companies to pay hundreds of millions of dollars in fines.
"Credit insurance is an extra product that you pay extra money for," said Peggy Twohig, assistant director of the Bureau of Consumer Protection at the FTC, which enforces consumer rights. "The one thing that consumers have to decide is whether they really need the product."
Certainly, credit insurance has its place for some consumers. If you don't have life insurance or disability coverage - perhaps you don't want to go through the hassle of taking a medical exam - credit insurance might be a good idea. Otherwise, your life insurance policy should be substantial enough to pay your family's bills should you die.
Older consumers or those in poor health might also consider credit insurance.
"Credit life insurance is basically designed to cover debt without any evidence of insurability," said Paul Graham, chief actuary at the American Council of Life Insurers, a trade group.
A medical exam is not required, but some companies may ask you to sign a statement saying you are in good health.
"It is beneficial for any borrower who does not have or will not acquire sufficient life insurance to protect his or her family," said Ken Reynolds, managing director of the American Bankers Insurance Association, an industry trade group. "And there is a large percentage of households without sufficient life insurance."
Just under 70 percent of American households have some form of life insurance, according to recent government figures quoted in the 2002 fact book of the American Council of Life Insurers.
Because the insurers don't check up on you, credit insurance is usually more expensive than other forms of insurance.
Consumer advocates say you get a better deal with more traditional life insurance.
"When you make a $400-a-month payment on your car, adding $40 doesn't sound like a lot of money. But with $40 a month, you can buy thousands of dollars worth of life insurance," said D.J. Powers, attorney for the Center for Economic Justice, which represents low-income consumers on insurance issues. "You should look at better buys for the same amount of money."
Consumers Union, a consumer support group, says that for about $500, a middle-aged nonsmoker in good health can buy $100,000 worth of term life insurance for 48 months. Meanwhile, buyers of credit insurance in Texas pay an average of $510 for a credit life policy on car notes averaging $21,000.
"That is about a quarter of the benefit," said Kathy Mitchell, research manager at Consumers Union. "Most companies sell credit insurance at the maximum rate allowed by law and pay very high commissions to the lender or seller. You can purchase a great deal more life insurance by shopping around for a term life policy and paying a low monthly premium."
Insurance industry representatives counter that many people buy credit insurance when they take out a loan because their life insurance benefit wasn't designed to cover the loan amount. For example, you may have a life insurance policy for $100,000 that's designed to feed, clothe and house your family in the event of your death. If you must take on an additional $20,000 in debt for whatever reason, credit insurance can provide the additional protection.
"There is a right time to buy credit life insurance, and there is a right time to buy fully underwritten life insurance," said Graham from the Council of Life Insurers.
Unfortunately, credit insurance sometimes is offered by salespeople who don't have consumers' best interests in mind.
In the heat of a $20,000 car-buying moment, credit insurance may be presented as one of several small but crucial add-ons. Or if a telemarketer is signing you up for a credit card, you may not be sure what you said "yes" to.
"You end up having a lot of hard-selling for this product," said Matthew Lee, executive director of Fair Finance Watch at Inner City Press in New York. "It is better to err on the side of not taking any add-ons. Take the documentation and go back in later and sign up for it - if you want it."
In a March study, Consumers Union said insurance companies seldom make payouts on credit policies. It reviewed more than 400 consumer complaints and found that policies were sold to auto buyers who had medical conditions that should have disqualified them.
In many cases, consumers were told after they made a claim that they didn't qualify. Their premiums were then refunded.
"Dealers downplay the importance of good health and sell policies to consumers who do not qualify for them," Mitchell said.
In a 2001 study, Consumer Federation of America and the Center for Economic Justice said consumers nationwide were overcharged by nearly $2.5 billion in a year. That amounts to more than a third of the premiums collected in the $6 billion industry.
In 2001, Consumers Union determined that credit insurance policies paid out only 42 cents for every dollar of premiums. That compares with a payout of 65 to 70 cents for every dollar collected for auto and homeowners' insurance policies.
Industry representatives say it's not fair to compare figures on different types of policies.
Consumer advocates say part of the problem stems from credit insurance agents who earn commissions of 25 percent to 50 percent.
The criticisms have drawn the attention of federal regulators. In a lawsuit, the FTC alleged that lenders with Irving, Texas-based Associates First Capital Corp. deceptively "packed" credit insurance into the sale of home mortgage loans.
Citigroup Inc., which acquired Associates, agreed last year to pay $240 million to 2 million consumers who had purchased the credit insurance between Dec. 1, 1995, and Nov. 30, 2000. The consumers were eligible for a refund of 60 percent of what they paid in premiums.
Citigroup made the settlement without admitting wrongdoing. It also made changes in its loan unit requiring that credit insurance sales be disclosed more explicitly.
"The regulation is so poor and the value is so bad for an overwhelming majority of consumers," said Birny Birnbaum, executive director of the Center for Economic Justice.
Birnbaum said not everyone who sells credit insurance is just after your money.
"When a credit union offers credit insurance, it is offered as a service because a credit union does not have customers, it has members," he said. "For most other lenders, credit insurance is another profit center."
© 2003, The Dallas Morning News.
Distributed by Knight Ridder/Tribune Information Services.