What is Credit Life and Disability Insurance?

Credit life and disability insurance are optional products offered by car dealerships and lending institutions to pay off your auto loan in the case of death or disability.

Consumers are not obligated to purchase these supplementary insurance products in order to be approved for an auto loan. Do not let anyone force you into buying credit life or disability products.

It’s ultimately your choice to buy credit life and disability insurance when purchasing a vehicle, and there may or may not be good reasons to buy it.

Table of Contents

What is Credit Life Insurance?

Credit life insurance will pay off some or all of your car loan if you die.

The word “joint” means more than one individual on the insurance policy.

Benefits of Credit Life Insurance

If you have a credit life insurance policy on your current car loan and die before the loan is satisfied. Your insurance coverage will cover the outstanding sum of your car loan.

Your family will not be forced to return the vehicle to the lender or risk losing their money or assets to pay off the remaining debt.

Did you know?

Credit life and disability insurance are optional finance products a car dealership will offer you in the finance department.
Unethical dealers may mark up these additional insurance products by 200% or more.
Some individual states have laws in place to keep dealers from marking up additional insurance products.
Most standard insurance companies offer these types of protections at a fraction of the cost.

Credit Life is Not for Everyone

Credit life policies can be costly for what they cover and the time they’re in effect. There are some circumstances where you may not want to purchase a credit life insurance policy. You should explore alternatives before buying a credit life policy, especially from a dealership.

If you believe you need coverage, there may be cheaper ways to obtain insurance. For example, you may want to look into a life insurance policy. This will allow you to pay off more than just your car loan and may be less expensive than a credit life policy.

Many car dealers will attempt to sell you credit life, disability insurance, or both while you’re in the finance department. They usually will pitch the overpriced product as an individual product or offer it to you in a package with other high-priced backend products such as extended auto warranties or GAP insurance.

I suggest you speak with your insurance agent before adding credit life and disability to your car loan. You may find a much better deal than the dealer offers.

Is the Price of Credit Life Negotiable?

Credit life and disability insurance are some of the many products sold in a car dealership’s finance department. These products have very high-profit margins.

Suppose you’re looking to purchase a credit life and disability policy from a car dealer. Ask the finance manager what’s the policy’s total price (not the payments). Read the fine print and ask what’s covered and what is NOT COVERED.

If everything looks good and you want to purchase the policy, tell the manager you’re willing to pay $50 over the policy’s cost to the dealer. Have the manager show you the cost sheet and have him show you it matches the policy presented to you.

A finance manager will have no problem selling you a policy because they get paid a commission and a bonus for how many policies they sell. If they won’t discount it for you, it’s their loss.

What is Credit Disability Insurance?

Credit disability insurance is a form of health insurance. This policy will make your car loan payments if you miss work because of being sick or disabled.

The word “joint” means there is more than one individual on the policy.

Credit Disability Restrictions or Limitations

There may be certain limitations or restrictions in the fine print of a credit disability policy. Some policies may only pay out a total dollar amount or a certain number of payments while you’re disabled.

You also need to be aware some disability coverage will not start paying out until you’ve been disabled for 14 days or more.

Credit Disability Coverage is More Expensive

Statistics show you have a better chance of becoming sick or disabled than dying.

This is why credit disability insurance is typically more expensive than credit life insurance and other insurance coverages.

Credit Disability Insurance is Not for Everyone

Credit disability policies can be costly for the period and what they cover. In some circumstances, you may not want to purchase a disability insurance policy.

You should ask specific questions and explore alternatives before buying a credit life policy.

Should You Buy Credit Life or Disability Coverage?

You will be offered an opportunity to purchase credit life and disability insurance and several other products when applying with a local bank, credit union, or dealership.

These additional products are not for everyone. How do you know if credit life and disability insurance are proper for you? First, you need to ask yourself a few questions and look at your financial situation.

Many people cannot afford to pay cash when buying a new or used car. They must apply for a car loan from a bank or credit union or use a car dealership’s financing. Our advice is to only use a dealership’s financing sources as a last resort. Going through a dealer’s finance department unprepared can be financially devastating to you.

When you apply for a car loan through a lender, they may offer or even insist; that you buy credit life and disability insurance policy to help protect your auto loan.

By law, car dealers cannot force you into purchasing credit life and credit disability insurance coverage.

You may also be able to purchase credit life and disability from another source. These companies can be very persuasive in how they present these insurance policies at the time of purchase.

If you don’t want one, listen to their presentations and politely decline.

Pros and Cons of Credit Life and Disability Insurance

As I stated before, credit life and disability insurance aren’t for everybody. Below is a pros and cons list to help you decide if it’s right for you.

Pros

You don’t have to pay much upfront because coverage will be included within your auto loan.
Peace of mind knowing that credit life will pay off your car loan in case of your death, and in the case of a temporary or permanent disability, the other will make your car payments.
In the case of death or disability, you will not have to worry about adding extra strain on your family or making payments on your car loan.
You are protected from losing assets and savings if you cannot repay your car loan due to illness, death, or being disabled.

Cons

These types of insurance coverage are more expensive than taking out a separate decreasing term life insurance or disability policy.
The lender is the beneficiary on the policy, not anyone in your family.
Suppose you choose to roll your policies into your car loan. You will pay additional interest on the original amounts.
You’re essentially paying for added protection for the lender if you cannot pay the loan off.
Credit life and disability insurance typically don’t provide coverage for individuals over 65.
Most coverage will not pay for pre-existing medical conditions. Read the fine print, usually health problems that have been diagnosed or treated within six months of applying.
Some disability policies will not pay out if you don’t work more than 30+ hours a week and will not pay benefits unless you’re disabled for more than 14 days or more.

Your policy is a binding contract between you and the insurance company. Before you sign anything, READ IT CAREFULLY! Your policy will explain when your coverage starts, how it works, what’s covered, and more importantly, what’s not covered.

If you don’t understand something, have your agent explain it until you do. No question is a stupid question, do not sign anything until you know what you’re signing.

Why You May Not Consider Coverage

If you already have a life insurance policy in place – If you currently have a significant life insurance policy, you may choose to decline to purchase credit life and disability insurance. The life insurance you currently have in place might be more than enough funds at payout to pay off your car loan if anything happens to you.

If you’re younger, you may want to look at cheaper insurance options – If you are younger in life and like what credit life and disability will do for you. You may want to look into more reasonable and more affordable options. Purchasing a decreasing term policy through your insurance company will typically cover your lender’s requirements for protecting their loan investment.

How’s your health – If you’re purchasing credit life and disability insurance. Always take time to read the fine print. Not only being over-priced and very expensive. Companies that provide automobile credit life and disability insurance usually practice post-claim underwriting. Post-claim underwriting is a questionable practice and a very grey area.

A car dealer will not ask any qualifying health questions when trying to sell the policy. It’s the assumed responsibility of the buyer to ask questions about any pre-existing medical clauses or stipulations included with the policy. If the policyholder becomes disabled, injured, or dies within the policy’s time frame. The insurance company may determine if the person fell victim to a pre-existing medical condition and not payout on the policy.

For example, you buy a credit life policy on a new car and a year later have a heart attack that causes death. The insurance company finds that you visited a doctor about chest pains three months before buying your insurance policy and determines you had a pre-existing medical condition. The fine print of your policy clearly states the insurance policy will not pay out due to death from a pre-existing medical condition within six months of policy purchase.

Other Types of Available Credit Insurance

Several other types of credit insurance may or may not be offered by financial institutions or car dealerships in their finance departments.

Insurance companies providing these products have become very creative regarding what’s going on within the world at any given time.

Other Types of Credit Insurance Coverage – Insurance companies can get very creative when offering different products to protect you from a life event. Most of the credit insurance policies offered are very expensive for what they cover and you most likely already have coverage through your insurance.

Credit property insurance coverage – This insurance will only cover the property (vehicle) you’re financing. If you already have renter’s insurance or a homeowner policy, your financed item will already be covered. You should avoid buying credit property insurance.

Credit unemployment insurance coverage – Credit unemployment coverage is a costly form of credit insurance. Car dealers are very good at using emotional scare tactics to get you to buy this type of credit insurance. This form of insurance will make limited payments on your car loan if you become involuntarily unemployed.

The bottom line when it comes to other types of credit insurance coverage is – Insurance companies are always looking to create a new way to make money and send these new insurance policies out to sell to the general public. If presented with any credit insurance coverage, ensure your insurance coverage does not already have you protected.

Shopping for a New Car?

Before visiting a dealership to buy a new car, it’s essential to know the dealer invoice price and what other people are paying for the vehicle in your local area. Otherwise, you won’t know a reasonable price to pay for any car you’re looking to buy.

Learn how to have dealers compete with each other online before ever stepping foot inside a dealership to guarantee you pay the best new car price and avoid any modern-day car dealer scams.

I highly recommend using an online referral service such as Ryde Shopper or Motor Trend. Their quotes will automatically include any discounts or cash-back incentives currently available in the marketplace.

About the author
My name is Carlton Wolf, and I’ve been in the car business since 1994, both retail and wholesale. I created the Auto Cheat Sheet to better educate buyers about the deceptive sales practices used by many dealerships throughout the country. Please understand that not all car dealers are dishonest. However, you never know who you’ll be dealing with, though. I’m willing to share my knowledge and experience with anyone who listens. Keep in mind that I’m a car guy, not a writer.