Credit life insurance — should you buy it?
Once of the worst sales techniques is passive. You have all been caught. It’s the, “unless you opt out of this, you will be paying for it” trick. The place you find it most often is on the bottom of credit card agreements in the smallest print. Only when you get the first statement and read it through to the end, do you discover you agreed to insure the debt. In theory, this is a great idea. Should you die while the credit debt is outstanding, your family will not be struggling to find a lump sum to pay it off. It would be more useful if it covered you against a job loss. No wait. That would be too great a temptation. You build up the debt and then manage to get a pink slip. Suddenly you have no credit card debt. Far too easy to manipulate. So the number of circumstances in which the credit insurance will pay out are very limited. Worse, it often applies to young people who have good health and great life expectancy. Put another way, this is a scam and the credit card companies use it to pad out their bottom lines. Everyone who can opt out, should opt out of credit insurance for credit card debts and small bank overdrafts.
Except, it might actually be worth considering for major loans. The largest single purchase most people make is their home. It makes sense to cover the outstanding balance of your mortgage with a life policy. It’s the same when you buy a new vehicle. The average price is around $30,000 for a reasonably reliable family car. If you have to borrow and then add in the interest, this also adds quite a large amount to the debt outstanding should you die. So how does credit insurance work?
Think of this as being like term life insurance, i.e. a policy you put in place for a fixed period of time and, in most cases, you do not intend to renew. It’s for a maximum amount and does not have any investment or cash value. But, unlike insuring your life for a fixed sum, this insures the decreasing balance on the loan. So, if you were to die within the first few months, there would be a big payout relative to the premiums paid. But if your loan has a five year term, the amount payable in the last year might be very low when you add up how much you have paid as premiums. Unfortunately, once you buy into this type of policy, you cannot opt out. You pay the same monthly amount through the term of the loan. There’s one element of unfairness in this. You actually buy the cover for a lump sum, borrow the money to pay for it, and then pay interest on the additional loan. Should you buy if you are borrowing a large sum?
- It gives you peace of mind knowing a big debt will be paid off should you die; and
- when you are young, it protects your family from debts; but
- it's usually more expensive than buying term life insurance where the premium is payable monthly without interest added - get quotes through this site to find out which is better value.