Unfair Lending Practices: Single-premium Credit Insurance Explained

Credit insurance is an option to aid in the payment of mortgage and other loans in the case a borrower is injured, becomes ill or even passes away. The option is often elected by a head of household to cover the possibility they would leave a family with a huge debt bill if an emergency occurred. Lenders often offer to roll this insurance into the cost of the loan, called single-premium credit insurance. Unfortunately, there is not often enough disclosure on the actual costs this would add to a loan. 

Adding Single-Premium Insurance

Credit insurance is required on most large loans. On mortgages, for example, it is called mortgage insurance. Even the Federal Housing Administration requires mortgage insurance on most loans. Many lenders will offer to provide the insurance as part of the loan before the loan contract is even signed. In this case, the insurance is not typically for the entire loan. Instead, it is provided for a short period of time, such as 5 years, when the loan will be active. It would then need to be purchased again every 5 years. The cost of adding insurance may not be avoidable, but with single-premium insurance, the interest rate is what actually causes the highest charges.

Rolling Over Interest Rates

Interest rates on loans are assessed each term, which is typically each month. When credit insurance is added to the loan, the funds used to purchase the insurance are actually borrowed or issued as a form of credit. As such, there is an additional interest rate on these funds. Lenders do not often disclose this fact well enough in the beginning, and some borrowers are not aware they are paying interest on a loan that amounts to a small actual value, such as $2,000 to $4,000. The borrowers often have the cash on hand to simply buy the insurance out right. If they are aware of the interest rates being assessed, often the highest on the loan, they would likely take the option to purchase the insurance on cash instead of credit. 

Alternatives to Single-Premium Insurance

Instead of using a lender to purchase single-premium credit insurance, look for outside options to insure your loan. Your existing car and home insurance company may offer credit insurance. The fees for the insurance may be slightly higher, but the interest will be much lower, resulting in an overall lower cost. Another viable alternative is term life insurance. Term life insurance is purchased for a specific period of time with great risk. For example, heads of household often purchase term life during the child-rearing years. With enough term life insurance protection, a borrower can use the life policy in place of actual credit insurance or mortgage insurance. If the borrower does experience a life-changing emergency, such as extended illness or death, the life insurance policy will pay out the remaining sum on the mortgage. The estate will remain in tact and the benefactors unburdened, which is the ultimate goal of any credit insurance on a loan.

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