CONSUMER ISSUES Advocates warn of pitfalls of credit insurance

Consumers often are better off with life insurance instead of credit insurance.
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."
Some might benefit
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.
Better to have life 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.
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.