Who Gets the Credit?

Credit insurance is not as well-known or well-understood as Auto or Homeowners insurance, even though the typical consumer will be bombarded with credit insurance offers every time they purchase a car, open a new credit card, purchase a home, or participate in many other financial transactions.  Unlike Auto property or Homeowners property, these coverages do not pay to repair the property.  Instead, they are related more to the amount you owe rather than the value of the property.

Guaranteed Auto/Asset Protection (GAP) Insurance — GAP insurance covers the “gap” between what your regular insurance will pay and what you actually owe on a vehicle.  As an extreme example, you go to the Ferrari dealer and finance the purchase of a brand new 458 Italia Coupe for about $240,000.  You call your insurance agent after the purchase and get a standard auto policy for this vehicle.  A month later you total the vehicle.  Because the 458 is only actually worth about $210,000 (because of depreciation) you are out $30,000.  Even though the vehicle is no longer operable, you still owe the bank the $30,000.  If you have GAP coverage on this vehicle, the GAP insurance pays the $30,000 to the bank and you are in the clear to purchase a new Ferrari!

Involuntary Unemployment Insurance (IUI) – Every time I call my credit card company, regardless of the reason, I have to hear them pitch the purchase of insurance that will pay my bills if I lose my job.  In light of the recent recession, this coverage made more sense as the national unemployment rates increased and maintained higher than normal levels.  There are a wide variety of coverages and many options available for IUI – some that provide coverage in the event of a strike or lockout, some make payments for only a couple of months and some make payments for up to a year.   Upon experiencing an involuntary unemployment event, IUI will make your minimum payments to your lender and by doing so can help protect your credit rating and alleviate some of the burden of being without a job.

Mortgage Credit Insurance (MCI) – MCI should not be confused with Mortgage Insurance (PMI), which is intended to make payments to the lender in the event of a borrower default.  Unlike GAP or IUI, MCI is considered a credit life type of insurance.  This is because the coverage is intended to provide a benefit should you experience a serious disability, injury, or death.  In the event of a triggering event, the benefit makes payments to the lender on behalf of the insured.

There are many other types of credit insurance products that provide coverage for many types of loans, life events, and collateral.  In common among the majority of credit-related insurances is that the lender (not insurer), is typically the direct marketer of the insurance product.  In addition, in most instances, the purchase of these policies cannot be a determining factor in whether or not the bank will give you a loan.  It is important that the consumer understand the coverages that they will be presented with and possibly purchase.  In some instances, such as when the consumer has an amount of savings sufficient to cover the losses that the credit coverage is intended to provide, it may not make sense to purchase the credit coverage.  In other instances, there may be insurance alternatives that make more sense to purchase.