Short answer: credit insurance is coverage sold with a loan that pays some or all of the loan if you die, or makes payments if you become ill or injured and cannot work. It is optional (OCC). A lender can leave the premium out of the finance charge and the APR only if the coverage is not required, that is disclosed in writing with the premium, and you sign or initial a request for it (12 CFR 1026.4(d)(1)). If the premium is added to the loan, you pay interest on it too.
The common types
| Coverage | What it does |
|---|---|
| Credit life insurance | May help repay the loan if you die before it is repaid, under the terms of the policy (OCC). |
| Credit disability insurance | Also called accident and health insurance. If you become ill or injured and cannot work, the insurer makes loan payments under the terms of the policy (OCC). |
| Loss-of-income insurance | Named in Regulation Z with credit life, accident and health insurance; the same optional rules apply (12 CFR 1026.4(d)(1)). |
| Debt cancellation or debt suspension | Not always insurance, but treated the same way when optional. With debt suspension, your payments are only paused and interest keeps building; the lender must tell you that (12 CFR 1026.4(d)(3)). |
Some policies combine credit life and credit disability into one, and may say how you can cancel (OCC). Read the policy for what it covers, waiting periods, and when it ends.
Optional means optional
- Premiums for credit life, accident, health or loss-of-income insurance written with a loan are a finance charge (12 CFR 1026.4(b)(7)).
- They can be left out of the finance charge only if all three conditions are met: the coverage is not required and the lender says so in writing, the premium is disclosed in writing, and you sign or initial a written request after getting those disclosures (12 CFR 1026.4(d)(1)).
- So a form already filled in for coverage you never asked for is a reason to stop and ask. If you do not want it, do not sign or initial the request.
- If a lender says you can only get the loan if you buy it, the coverage is required, and the premium belongs in the finance charge and the APR. You can report a problem: see how to file a loan complaint.
Where these lines sit on your papers, next to the APR and the total of payments, is shown in how to read a loan disclosure.
What a financed premium costs: a worked example
Assumptions: $3,000.00 at 30% APR for 24 months, and a single premium of $150.00 for the coverage added to the loan. The rate and premium are examples, not quotes.
| Without the coverage | With the premium financed | |
|---|---|---|
| Amount borrowed | $3,000.00 | $3,150.00 |
| Monthly payment | $167.74 | $176.13 |
| Total of 24 payments | $4,025.76 | $4,227.12 |
The coverage costs $201.36 over the loan: the $150.00 premium plus $51.36 of interest on it, or $8.39 a month. Monthly payment: P x r / (1 - (1 + r)-n), with r = APR / 12, rounded to the cent; total = payment x 24.
Because the coverage is optional, the disclosed APR stays at 30% in both columns. If the same $150.00 were required, it would be part of the finance charge: 24 payments of $176.13 for $3,000.00 of cash works out to an APR of about 35.36%. Compare offers by total of payments as well as APR, and see APR vs interest rate.
For active duty servicemembers and covered dependents, the Military Lending Act counts credit insurance premiums in the 36% rate cap; see our MLA guide.
Questions to ask before you sign
- Is this coverage required for the loan? Where does the disclosure say so?
- What is the premium, and is it paid up front and added to the loan, or monthly?
- Does the coverage last the whole loan? If not, for how long?
- Can I cancel, and do I get part of the premium back if I cancel or pay the loan off early?
- Do I already have life or disability coverage that would pay this debt?
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.