So I work in car sales (yes bash me go ahead) BUT I wanted to share something. Recently we partnered with a credit union that provides pretty decent rates, actually very low rates. However they bundle credit life into all of their loans. Now the Credit Union has asked us to not talk customers out of it, however if a customer notices it/wants to decline it they will take it out.
So let me tell you why buying credit life especially on a car loan is a bad idea.
What is Credit Life
Credit Life is an insurance policy on a loan that basically says if you die before you can pay it off, the loan will automatically be paid off and whoever is your next of kin can get the car.
Sounds like a great idea right?
What Does Credit Life Cost
So I typically sell cars that have finance amounts of between $20,000 and $50,000. Credit life tends to run $800-$2,000 for the term of the loan (rough numbers)
Why is it a bad idea?
Its basically an expensive form of term life insurance. But worse, you see once the loan for the car is paid off you can no longer make a claim on the policy.
Lets compare the cost to say a 10 yr no medical exam term life insurance policy for a 39 yr old for $50,000. Monthly that term life will come out to $979.20 (now you can get a lot more insurance for not a whole lot more money) So for $979.20 you can ensure if you die within the next 10 yrs your loved ones will get $50,000 in cash.
Now with credit life, say on a $50,000 car not over 5 years you’d pay $2,000 in total (roughly) for the policy…BUT that $2,000 only covers the cost of whatever the balance of the car is worth, and once the car is paid off/sold/etc the policy basically goes away.
So your paying double, for t he same coverage for half the amount of time…and say you live 3 years and then die and you owe say $20,000 on the car…ok well the insurance will pay off the $20,000 and your family gets to keep the car. But had you simply gone with term life for the same amount your family would still be getting $50k, also you would have paid 3 years of premiums not 10 yrs, so the cost would be even smaller.
Do you see my point? Life insurance is important, but credit life is expensive.
How to avoid
Read your finance contract and look for credit life/credit disability it should be declined, its not uncommon for dealers/banks to simply “include” it in your payment. So the bank or dealer will go “Ok great we got you approved with $5k down for X% and your payment is XYZ” what they aren’t telling you is that if you decline credit life your payment will be $20-$30 cheaper since the cost is rolled in.
So remember always decline credit life.
Is there ever a good time to buy credit life
Not in my opinion, I’m a firm believer of life insurance and think we should all have it to cover expenses for after we pass. However credit life is very expensive for the little benefit it provides. In fact its a MASSIVE profit center. I had a bank VP once tell me the only reason they push for car loans so hard is because of the commission they make off of credit life. He could care less about the APR he earns on the car, he’s much more excited about that immediate $400-$500 kick back from credit life.
Also the VP likes it because if someone does buy credit life and they die…the bank gets their money. Sure you get the car, but the bank doesn’t really want your car, they want your money.
What should I do instead?
Consult someone more knowledgeable then me, and purchase a good solid life insurance policy that will adaputely take care of your family and erase any debts you may owe when you pass
What happens if I don’t have life insurance or enough money to cover my car loan debt and I die plus I declined credit life and my family can’t afford the car
So when you die, assuming this car loan is just in your name the bank will approach your family and try and get them to take responsibility for the dead. At this point your family can say “no” of course payments will stop for the car, and the bank will repo the car. Your family will get to use the vehicle for a few months, until the repo man finally comes. At that point your car will be sold, if its sold for less then what you owe…the bank will sue you. But remember you are dead. So naturally you’ll lose…because your dead. But remember you don’t have any real assets and no life insurance? so the bank is up shit creek without a paddle.
Your family is not responsible for the debt that you incurred.