Why Credit Insurance Is a Bad Deal

published 3 August 2010

I just bought a new house, and I’ve been inundated with mailings from companies offering credit insurance, which will pay off my mortgage if I die. Should I get it?

In most cases, credit insurance is a bad deal. This type of insurance, which is pitched to you if you buy a house or refinance, offers to pay off the outstanding balance of your mortgage or loan if you die. The problem is that these policies tend to be very expensive for what you get. Plus, they limit your heirs’ options for the life-insurance money: Your heirs may have other priorities than paying off the mortgage, especially one with a low, fixed interest rate.

“What we have learned over the years is that insurance that is offered in conjunction with a sale of other products is often way overpriced and frequently not needed at all,” says Robert Hunter, the director of insurance for the Consumer Federation of America and former Texas Insurance Commissioner. One of the problems with insurance sold with a loan is “reverse completion -- the salesperson is selecting the insurance company, and you aren’t,” he says.

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Instead, most people can get more insurance at a lower price by shopping around for a regular term life-insurance policy themselves. A healthy 40-year-old man can buy a 20-year, $500,000 term life-insurance policy for less than $400 per year (a woman the same age could pay less than $360). And your heirs can determine the uses for the death benefit. You can get price quotes from dozens of insurance companies at www.accuquote.com or www.lifequotes.com. See How Much Life Insurance Do You Need? for more information about buying life insurance.

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Ask Kim

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.