For most of us, buying a car is the second largest financial transaction we'll make, next to buying a home. And we're likely to get loans to finance our car purchase. In the fourth quarter of 2014, 84 percent of new cars purchased were financed, according to Experian Automotive.
If you're financing your car purchase through a dealership, it's also likely that the finance and insurance manager will offer you warranty and insurance products, such as an extended warranty, gap insurance or tire-and-wheel protection. The F&I manager might also offer credit protection, which is meant to cover your car payments should you be unable to pay them yourself because of layoff, injury, illness or death.
The most venerable of these products, with an almost 100-year history, is credit insurance. Consumer groups have long been leery of credit insurance products, which are offered not just for cars, but also for credit cards and other consumer loans. Often, the consumer groups contend, the products are expensive and unnecessary. Further, there have been instances of lenders forcing the credit insurance on consumers.
"It's often very expensive when you compare it to the benefits," says Chris Kukla, senior vice president with the Center for Responsible Lending, a nonpartisan, nonprofit organization focusing on consumer lending, based in Durham, North Carolina. Further, he says, the credit insurance policies are "riddled with exclusions."
Payout rates (the premium dollars paid compared with the amount paid out in claims) are typically low. That's because the money is going to commissions, he says.
There are some decent providers of credit insurance, such as credit unions, Kukla says, but it's tough for consumers to know which products are worthwhile and which ones are rip-offs. To protect themselves, potential buyers should look for coverage they can afford that specifically addresses their financial concerns and which comes from a reputable insurer. The insurance department in your state is the place to check in order to see that the company is licensed and legitimate, says automotive expert Lauren Fix.
The three most common types of credit insurance coverage are:
Credit life: This pays off all or some of your loan if you die during the time you're covered.
Credit disability: Pays on the loan if you become ill or injured and can't work during the time you're covered. It's also sometimes called credit accident and health insurance.
Credit involuntary unemployment: Pays a specified number of monthly loan payments if you lose your job through no fault of your own, such as in a layoff, during the coverage term. It's also known as "involuntary loss of income" insurance.
None of these coverages is required with a car loan. You can't be denied credit if you say no to a credit insurance offer, Kukla says.
Payment Protection: A Newer Product
A more recent type of credit protection is called debt protection, which might also go by such names as debt cancellation, debt suspension or payment protection. Federal law allows national banks, most state-chartered banks and credit unions to offer this benefit without involving an insurer. The bank or credit union fills that role.
Debt protection provides benefits that are similar to credit insurance. It's typically offered when you sign your loan papers.
A New Approach: The Walkaway Program
The Great Recession of 2007-'09 had a devastating impact on consumers and brought car purchasing to a near standstill. Who could feel comfortable buying a new car if there was a good chance you'd lose your job tomorrow? The recession has had "a major impact on the psyche of the car buying public," says Steve Klees, senior vice president at EFG Companies in Irving, Texas.
In the midst of the recession, EFG partnered with Hyundai to offer the Hyundai Assurance program, introduced to consumers during the 2009 Super Bowl. It offered people the peace of mind to buy that new car. If you lost your job within a year of buying your new Hyundai, the automaker promised, it would take the car back. By the time that program ended in 2011, 350 people had returned their vehicles.
While Hyundai Assurance is gone, EFG makes available a similar product, called Walkaway, which is available through 350-400 dealerships, banks and credit unions across the country. When an involuntary job loss or other triggering event happens, the program releases customers from a car lease or loan obligation. Typically, the dealership, credit union or bank pays for the first year of coverage. After that, customers have the option of purchasing the coverage package for $395. There are no underwriting guidelines or restrictions except that the purchase price of the vehicle must be less than $75,000. "That's probably 99.9 percent of all cars," Klees says.
Klees says the "sweet spot" for Walkaway is with customers ages 25-40 — not surprising given that this group is least secure in their job situation, compared with other groups. Klees, a 35-year veteran of selling credit insurance and other add-on products, says purchasers of traditional credit insurance tend to be older.
What To Ask Yourself and the Lender
The popularity of debt protection products has been on the wane over the decades. In a long-term study for the Federal Reserve, the percent of people who said they purchased debt protection coverage in 1977 was 63.9 percent. In 2012, that dropped to 22.7 percent.
If you are interested in a debt protection product, the Center for Responsible Lending suggests that you purchase the products through a credit union or bank, where the rates may be lower. Compare any dealership price quote and terms to ensure you're getting the best deal for comparable coverage. Also, the National Association of Insurance Commissioners advises you to ask these questions before you buy:
- What's the premium? Will it be financed as part of the loan? And will that increase your loan amount so you'll have to pay additional interest?
- Can you pay the premium monthly instead of financing the entire premium as part of your loan?
- What's the loan payment minus the credit insurance?
- Will the insurance cover the loan's full length and amount?
- What are the limits and exclusions on payment of benefits?
- Is there a waiting period before the coverage becomes effective? If so, how long?
- With a co-borrower, what coverage does he or she have? What's the cost for that coverage?
- Can you cancel the policy? What kind of refund is available? Are there any penalties?
It's also wise to see if you have other insurance that might eliminate the need for a credit insurance contract in association with your car purchase. A term life insurance policy would provide benefits in the event of your death. Your employer may make disability coverage available. Check with your insurance agent to see what your current coverage would provide before you buy credit protection.
If at any point you feel pressured to buy credit insurance, it's best to simply walk away and consider your options in a pressure-free environment. In the words of the National Automobile Dealers Association, "once you sign the contract, you are legally obligated."
To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.