COST EQUATION: CREDIT LIFE AND TERM LIFE INSURANCE

Periodically, credit insurance critics advise consumers to forego credit life insurance in favor of term life insurance.

Often, that's misguided advice.

They fail to explain the difference between term life and credit life insurance.

The better explanation helps consumers compare value and cost to buy only as much insurance as they need or can afford.

We can agree that higher income consumers who can afford large amounts of life insurance probably do not need credit insurance.

We can't agree that applies to most consumers.

We know when it comes to life insurance many consumers are uninsured or underinsured.
Either they don't have any or they have only a little. A 1999 study found that 25 percent of U.S. households have no life insurance at all.

If most consumers don't have insurance or enough insurance, they do have debt.
Total non-mortgage consumer debt in the U.S. rose to $1.5 trillion at the end of 2000. Repayment of about one-seventh of this debt ($212 billion) is protected by credit life insurance.
With those numbers in mind, let's look at the cost/value equation between credit life and annual renewable term life insurance.

We'll compare:

q       credit life decreasing term insurance to insure the average-size closed-end loan protected by this kind of policy ($6,000) for a typical loan period of three years,

q       to the cost for a $50,000 renewable term life insurance policy.

We'll compare the costs for a three-year period.

We'll make the comparison at a rate of 50 cents per $100 for credit life insurance and 30 cents per $100 of term life insurance plus a $25 annual policy fee.

We'll use those rates because the one for credit life insurance is the average 200 I rate throughout the U.S. while the rate for term life is fairly typical and standard.

The total three-year credit life insurance cost would be $90.

The term life insurance would cost $175 the first year. Every year the rate and the cost for the term life may increase as the insured person ages.

The three-year cost of the $50,000 term life policy would actually add up to $475.

Because of the policy fee, a $6,000 term life insurance policy would have a three-year cost of at least $79, but no ordinary insurer would issue such a small amount.

If all you want or can afford is credit life insurance, then term life insurance simply does not meet your needs and credit insurance is the right answer.

On the other hand if you can afford the higher amount of term life insurance, and it meets all your life insurance needs - including debt repayment, then term life insurance may be the right answer for you.

Telling consumers to buy term life insurance instead of credit life insurance without knowing their individual circumstances is the wrong answer.

Only you know what you need and can afford.