CONSUMERS : Credit Check : A Close Look at Life Insurance Designed to Pay Your Bills May Show Either You Don’t Need It or That It’s Not Worth the Cost

Thinking about buying a big-ticket item--maybe a car or a houseful of furniture--on an installment plan? Chances are, the seller will ask if you want credit life insurance, which guarantees payment of your loan if you die.

It sounds like a reasonable idea, getting insurance to ensure that your family doesn’t have to pay off that big loan.

But think again: You may not need that insurance, and it may cost too much.

If you’re single and have no heirs, installment credit policies are a waste of time and money--unless you want to ensure your creditors are paid off.

If you have a family, a modest income and a lot of debt, you might want it, although most insurers believe that you can simply increase your life insurance coverage--at lower cost.

If you’re an older consumer and not in good health, credit life insurance may be the best you can do, because you might not be able to increase your life insurance. But shop around, because rates vary dramatically. Credit life insurance that might cost $123 in Maine could run $533 in Alabama, a recent consumer survey showed.

“Credit insurance is not necessary or even the best deal for everyone,” said Virginia Stafford of the American Bankers Assn. in Washington, D.C. “For some people, it may represent a good deal. Not everyone has a regular life insurance plan or disability. Consumers who do may not need it. Dollar for dollar, it is more expensive than a regular term or full life insurance plan . . . But all consumers should be educated about what it is, and be aware of their insurance needs.”

Most industry experts agree that consumers are poorly informed about credit life policies--or credit disability policies, which will pay your loans if you’re disabled--and don’t really understand what they are for.

Although buying such policies is an individual consumer decision, some think it is automatically included with loans or that they can’t get financing without it. Others confuse it with health insurance.

Two national consumer groups have come down hard against credit life insurance, calling it “the nation’s worst rip-off.” The Consumer Federation of America and the National Insurance Consumer Organization issued a report last month insisting that credit life insurance costs too much and has a low loss ratio--the proportion of premiums paid out in claims.

“The only remedy to this problem is more effective state regulation coupled with extensive consumer education,” the report stated, adding that in 1988, American consumers were overcharged nearly $1 billion on credit life insurance policies. In some states, the report said, consumers are overcharged 200% to 300%.

The nationwide study considered only consumer installment purchases for cars, home furnishings and appliances, not with insurance policies on home mortgages, which, Consumer Federation executive director Stephen Brobeck said, “actually are a better value.

“We’re talking about installment credit,” he said. “And urging people to carefully consider whether they need this insurance. If they consider it, most will reject it. It’s so much cheaper to go to their regular life insurance agent and get another $10,000 in coverage.”

Brobeck admitted that the study showed that credit life is “obviously a better buy in some states than others. It depends on the pay-out ratio. In New York and Maine, over 70 cents on every $1 of premiums gets paid out. In some of the Southern states, it’s only 30 cents. That’s practically nothing.”

Peter Groom, a lawyer for the California Department of Insurance, observed: “People should remember that the main reason the creditor is selling (credit life insurance) is that he’s going to make lots of money off it. They make an extremely high commission on it. And the more the creditor makes off this stuff, the harder he works to sell it.”

The Consumer Federation survey found that “commissions routinely exceed 40%, and in the highest rate states, can exceed 70%. . . . In the credit life insurance market, lenders are the real shoppers. They shop insurance companies for the best deal for themselves, especially for high commissions.”

Under federal law, Groom explained, credit life insurance must be disclosed with the loan document. It cannot be added to loan finance charges without a consumer’s knowledge, “but there are people who still do it. Or they’ll say, ‘Well, your credit is kind of shaky. The loan will go through easier if you sign for (credit life insurance).’ ”

Groom added: “The real issue is do you need the insurance or not? It’s a personal decision. It may offer you peace of mind for your family. But, if it’s for a second car, why not just let them come get it (if you die)?”

Representatives of the credit insurance industry insist that those who buy their policies get a good deal because many of them cannot afford regular life insurance coverage or cannot qualify for more of it.

“Purchase of this ordinary-term life policy may be a ‘good buy’ if the consumer needs, wants and qualifies for and can afford $50,000 of coverage,” said William Burfeind, executive vice president of the Chicago-based Consumer Credit Insurance Assn., which represents 200 credit insurance companies. “But if the consumer needs or wants $5,000 of credit-related coverage, credit life insurance is a ‘better buy.’ ”

He asserted that the average consumer is under-insured, with few having life insurance equal to the industry recommended level of four to six times their annual income.

Buyers of credit policies are people “who cannot afford ordinary insurance products because of the minimum policy purchase requirements,” he explained.

Gene Grabowski of the American Council of Life Insurance, a trade group in Washington, D.C. with more than 600 members, added: “Credit life insurance is not for everybody. But it can be a useful product. If you’re insured well, have six times your annual earnings and low debts, you don’t need it. But, if you’re an average Joe making $27,000 a year, are insured for $50,000 and decide to buy a $10,000 car and finance $8,000 of it, credit life might be just the ticket. I think that person should buy it.”

But, Grabowski cautioned, consumers should do homework on credit life insurance “before they go to the car dealer. You know you’re going to finance it going in, so go to your own insurance agent and ask about it. You might get a better deal.”