Credit insurance

Trade Credit Insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors or other factors. This insurance product is not related to the product described below. Ironically, the links and history below are relevant to the subject of Trade Credit Insurance

Credit Life Insurance is a consumer purchase, often sold with a big ticket purchase such as an automobile. The insurance will pay off the loan balance in the event of the death or the disability of the borrower. Although purchased by the consumer/borrower, the benefit payment goes to the company financing the purchase.

Credit Insurance is an insurance policy associated with a specific loan or line of credit which pays back some or all of any monies owed should certain things happen to the borrower, such as death, disability, or unemployment.

The costs (called a "premium") for this are usually charged monthly, depending on the balance owed, and depending on the usage of the loan or line, could almost double the cost of it (on the opposite end of the spectrum, clever usage could avoid having to pay almost any premium at all).

The sale of credit insurance is controversial because it is almost always cheaper for an individual to forgo credit insurance, and instead have a term life insurance or disability insurance policy to cover the credit balance. The reason is that credit insurance is guaranteed issue, no matter if a person would otherwise be insurable or not. So the rates offered must reflect this, and be worse than if a healthy or other wise insurable person were to purchase coverage on their own.

In addition, there is an even more controversial practice (called single premium credit insurance), usually associated with the sub prime lending industry, of charging the premium only one time at the beginning of the loan. For example, charging 5,000 dollars at the time of a mortgage refinance, which is usually financed (added to the total loan amount) as part of the loan. This is considered very bad by critics, since doing this is only cheaper if one is sure that one is going to stay with the loan forever and not refinance. Critics contend most people do not realize this and lose money by refinancing once again, thereby losing the benefits of the credit insurance.