Credit Insurance

Credit health insurance is designed to cover a borrower's indebtedness, with the creditor receiving the policy benefits to pay off the debt if the borrower becomes disabled or dies accidentally. Credit insurance can be written as an individual policy for a single borrower or group coverage for a number of debtors with the creditor as master policyowner.

Individual credit health insurance is handled in essentially the same manner as any other type of individual health insurance policy. The applicant applies for the policy and receives it on the basis of individual selection. The borrower is the policyowner; he or she designates the creditor as the recipient of the policy's benefits. The most common type of credit health insurance, however, is group coverage sold as a master policy to a creditor who routinely acquires new borrowers yearly. In most states, a creditor must have a minimum number of borrowers per year (typically 100) before it can qualify for this type of policy.

Group credit health insurance has many of the same features as any other group insurance coverage. For example, there is no individual selection of insureds, so no evidence of insurability is required. And because group credit coverage is nearly always contributory (in other words, the insured pays at least part of the premium), a high percentage – usually around seventy-five percent – of the people to whom it's offered must actually want the coverage. Borrowers typically pay for group credit health insurance as a part of their monthly loan payment.

In some states, and under certain conditions, a creditor can insist that a borrower have some type of insurance to help secure his or her loan. Some lending institutions even have their own or affiliated insurance companies through which they write all of their credit insurance policies. However, the borrower is never required to obtain insurance through any company that's suggested by the creditor. Selecting the insurer is always the borrower's option.

Again, the rationale behind credit insurance is to pay off the insured's debt if he or she becomes disabled or dies accidentally. Since this is the objective, the accidental death benefit can never exceed the total amount of indebtedness at any given time, nor may the monthly disability benefit exceed the amount of the loan's monthly payment.

As previously stated, credit health insurance only covers the accidental death of a borrower. Thus, if death were to occur by natural causes or other means, the credit health policy would provide no benefits. Credit life insurance, on the other hand, pays death benefits regardless of whether the borrower's death is natural or accidental.

Credit life, which may also be in the form of either individual or group coverage, like credit health identifies the creditor as the beneficiary of the policy. The proceeds, or face amount, of the policy may not exceed the indebtedness at the time of the borrower's death. Decreasing term life insurance is usually used for this type of policy. This therefore means that the policy is in effect only for the period of indebtedness, and the face amount of the policy always equals the amount owed at any given time.

Credit insurance tends to be somewhat expensive for the amount of coverage that it provides. Additionally, if the borrower already has reasonable healthcare and life insurance protection, purchasing credit coverage is probably not greatly needed.