Credit disability and credit life insurance policies are available to most consumers when they make a major purchase such as a car or a boat where a loan is involved. The policies are supposed to make your payments or pay off the loan if you become disabled or die. However, some say that the policies aren’t worth the paper their printed on.

Why consumers should beware

Credit disability and credit life insurance policies are not a good type of insurance because they focus on just one transaction, according to Bob Scott, a California attorney and partner with the Advocate Law Group. In a recent interview, Scott explained the concept:

Credit disability and credit life insurance could all be attached to any credit instrument that one would buy. For example, a car loan could have credit disability or credit life policy and it would operate for any transaction the same way. If you became disabled and had a car loan, then the insurance company would make the car payments for you for a period of time or extinguish the loan altogether. If you died and had a car loan, then the amount of the transaction would then be paid by the credit disability company. However, they’re linked to just one transaction and they’re very expensive.

Bad for consumers – great for insurers

Scott says that these types of insurance policies are great for insurers because consumers rarely submit claims. He told us:

The people that push these kinds of policies all get a very good commission from the sale. In this case, it would be the car dealer, but it could also be a mortgage broker or a credit card company. The reason they get a good commission is because there’s a very low loss ratio with these policies. A loss ratio is, of course, how much money you take in versus how much money you pay out. These policies have very low loss ratios and always have.

Low ratios have prompted investigations

Scott says that the ratios are so low that these types of policies that they have continually been the source of investigation by regulators. He continued, “These types of policies have been the subject of numerous investigations, as far back as 20 years ago, by the National Association of Insurance Commissioners on certain insurance companies that specialize in these products because they have had such great profit – beyond the profits normally allowed by insurance commissioners.”

He says that there are two reasons for the investigations, “The first is that these policies are very unique items, and second, they tend to not handle the claims correctly at least for some of them – often putting the disabled or the deceased’s family through a lot of hoops and then they still don’t pay. As a result, bad things usually happen because your house doesn’t have the mortgage being paid, your car gets repossessed or your bank cards are turned into collection agencies.”

There is an alternative

For those consumers who want to make sure they’re covered in the event of disability or death, Scott says that there is an alternative to credit disability and credit life insurance. He explained:

It’s much better to buy one big life insurance policy or one big credit disability policy that would cover all of your financial needs. It’s far less expensive and the companies are a bit more credible in terms of their claims’ performance.

In addition, you usually don’t pay an extra fee for it. It’s mixed in with your fee. But on cars, mortgages and other financial transactions, there’s usually a distinguishable box, square or highlighted area on the policy that you have to fill in a little bit of information and pay a premium – which is usually financed along with the transaction. So the originating entity gets the bump, or money, on the commission and they also get the bump on the increase in the transaction fee associated with the credit instrument.

If your insurance company hasn’t paid your valid credit disability or credit life insurance benefits, they may have acted in bad faith. To contact a qualified attorney whose practice focuses in this area of the law, please click here. Consultations are free, without obligation and are strictly confidential.