Credit card issuers seek to insure customers
-- and ensure repayment of debt
By Janet Bigham Bernstel • Bankrate.com

The First USA new card folder almost begs: "Safeguard your family's security."

When anything is bought on credit, an offer of credit insurance often follows, whether by direct mail, phone solicitation or little check-off boxes on an application.

Credit insurance is usually a package of life, disability and unemployment coverage designed to pay off the minimum monthly payment should the borrower lose his job, die or become disabled.

With fixed loans such as a mortgage, a single insurance premium would be divided among the monthly payments. But the structure of protection for a revolving credit card debt is different. It's calculated each month to cover only the debt that existed at the last cyclical billing.

Costs add up
"The typical rate is 75 cents for each $100 of loan coverage per month," explains Jim Hunt, a New Hampshire life insurance actuary. "So your credit card charges a 15 percent finance charge and the insurance adds another 8 or 9 percent. That's not an insignificant amount of money."

Basically, it is an insurance company product sold to banks and retailers at a group rate. They issue it to consumers at what experts feel is a very high price.

"It's a small industry that sells protection in the event you can't make your payments," says Stephen Brobeck, a chartered financial analyst. "Essentially, you buy it and it's very expensive; it's not a good deal."

At the typical rate, the premium on a monthly balance of $4,000 would cost $30. Over the course of a year, this security would cost about $360. Critics argue that a life insurance policy would cost less and pay more in benefits. Insurance experts agree, but say that's not the reality.

"What happens is that most people don't buy that term life insurance they ought to have," says Walter Runkle, vice-president of government relations for the Consumer Credit Insurance Association. "Twenty-five percent of households in the United States have no life insurance. We offer them a convenient way to take care of one of their obligations."

Different states, different regulations
Because state insurance commissioners set the maximum rates on credit insurance, lenders argue that the high prices are not their fault. State regulation also means the costs vary nationwide.

"The states unevenly regulate it, so it's a better buy in New York by far than it is in Louisiana, where it's a terrible buy," says Hunt. "But if you're 60 and in poor health, it's a good buy anywhere. If you're under 40, it's a bad buy."

And it's take-it-or-leave-it insurance, says Hunt. There is no way to comparison shop, the purchase is either made from the company lending the money or credit, or it isn't made. So, as with any contract, scrutinize the fine print for things like premium rates, payout maximums and restrictions. Many cap the payoff at $10,000.

A 1998 Installment Credit Survey Report just released by the American Banker's Association shows that fewer than 22 percent of borrowers buy credit life insurance, and fewer than 4 percent buy unemployment insurance. Exact numbers are not tabulated by the association.

Used by the underinsured
"The people who tend to use it are people who earn a lower income and don't have other insurance," explains Runkle of the Consumer Credit Insurance Association. "It tends to be more attractive to minorities and the less educated. This may be the group who has less contact with individual (insurance) agents."

Runkle says that people who do buy credit card insurance will often buy it again, when they discover how easy it is to submit a claim. He says a doctor's note stating total disability, or a death certificate for full payment, is all that's needed to claim a benefit.

Even consumer advocates admit that it may be a type of "last-resort" protection for the right person, such as the older smoker in poor health. Here is what a typical credit card insurance policy offers:

• Voluntary enrollment
• Cancellation at any time
• Rates regulated by the state insurance commissioner, regardless of age, gender or health
• Premium fee calculated on current monthly balance
• Benefit of minimum monthly payment if borrower is disabled or unemployed
• Full payment benefit in the event of death or dismemberment, with a cap set typically at $10,000
• Personal credit rating maintained in good order in the event of disability or unemployment

It's hard to miss the boat on this one. There is almost always another chance to buy -- probably on the next credit card bill. But remember to review the offer carefully; it may be more trouble than it's worth.

-- Posted: Feb. 15, 1999