Credit Insurance Issues
Credit insurance protects the lender if the borrower cannot pay off a loan. According to the Federal Trade Commission, credit insurance is usually an optional purchase. Some banks will require credit insurance if the loan request appears risky. The borrower’s purchase of credit insurance may convince the lender to offer better terms, such as a lower interest rate or a smaller down payment.
Alternatives
Other types of insurance can cover the same negative events that credit insurance protects against. Life insurance provides a payment on the user’s death, and disability insurance pays out money if a worker is injured. According to the Federal Citizen Information Center, a person who is considering purchasing credit insurance should check the prices of other types of insurance that cover the same types of losses.
Requirements
There are several different types of credit insurance. According to the state of Wisconsin, the types of credit insurance that are available include life insurance, disability insurance, unemployment insurance and property insurance. Lenders may not require the first three types of insurance before offering the loan, but a bank can require a borrower to purchase credit property insurance.
Credit property insurance applies directly to losses or damage to the item the borrower purchases with the loan, and the other types of insurance pay off the loan if the borrower can no longer work.
Cancellation
Prospective borrowers should check to see if there is an option to cancel the credit insurance after certain conditions are met. A lender may require various types of credit insurance if the borrower does not make a sufficient down payment on the loan. After the borrower pays off enough of the loan principal, the borrower may be able to cancel the credit insurance and reduce monthly payments on the loan.
Life Insurance
Credit life insurance differs from other life insurance policies. A traditional life insurance policy increases in redemption value when the holder makes payments. Some companies will purchase a life insurance policy from the holder for an immediate cash payment. Since credit life insurance pays off the lender, not the insurance buyer, the credit life insurance buyer cannot sell the policy to another firm and receive a cash payment.
Free-Look Period
Credit insurance buyers may have the right to cancel the insurance without additional fees for a limited time. According to the state of California, credit insurance often includes a free-look period, which usually lasts between 30 and 90 days. The insurance seller does not bill the consumer for the insurance premium until the end of the free-look period, so the borrower should carefully examine store credit applications to see if this condition is present.