If you've just taken out a loan, or are in the process of borrowing money or signing up for a credit card, your lender may have offered you credit insurance. The policies promise to pay your loan if you die, go on disability or lose your job.

You might wonder if you really need credit insurance.

Here are some of the basics of credit insurance:

• You are not required to buy credit insurance as a condition of any loan or financing.
• You must purchased credit insurance at the institution where you obtain your loan.
• Credit insurance is most commonly offered as a group policy through a bank, credit union or vendor such as an auto dealer or furniture store, although you may be able to buy a policy individually.
• Credit insurance benefits are paid to the lender, not to you, in the event you make a claim.
• The credit insurance benefit decreases as your loan balance decreases.
• There are two primary ways to pay for credit insurance: monthly premiums or a single premium. Some "single-premium credit insurance" gets lumped into your principal and financed with your loan when you buy new furniture or a new car. That means you don't have to write a check for the credit insurance but you're paying interest on those premiums.
• Credit insurance is often sold in a package, which typically includes credit life insurance, disability insurance and unemployment or property coverage. In some cases, your only choice is to buy the whole package or none, even if you are ineligible for benefits under some of the policy types. Some states mandate that you must be offered individual coverages.
• Credit insurance can be purchased without a medical exam and the premium does not vary according to your age, unlike life insurance.
• Credit insurance may not pay if you have a pre-existing health condition.
• A credit insurance application may ask for your medical history. You may not be eligible for credit insurance if you have had a serious medical condition like cancer or heart disease.
• Some credit insurance will not cover the full amount of your outstanding loan or the full term. For example, in New York the maximum allowable coverage for credit life insurance is $220,000 and you may have a higher mortgage; some policies may cap the amount at less.
• The lender or insurance company can cancel your credit insurance with advance notice if you pay your premiums in monthly installments. If you've paid with a single premium, your credit insurance cannot be cancelled.

The cost

The average premium in 2006 for credit life was 49 cents per $100 of debt annually, according to the Consumer Credit Industry Association (CCIA) in Chicago, an industry trade group. That means if you carry credit life on a credit card where you have a $5,000 debt, you'll pay $24.50 a year. For credit disability, the average premium was $2.15 per $100 of debt annually, with the rate declining as the length of the loan is extended. Figures for credit property and credit unemployment are not available from the CCIA.

The business of credit insurance

William Burfeind, executive vice president of the CCIA, says the target customer for credit insurance is "the uninsured or underinsured with little or no liquid assets who's assuming a financial obligation they could not honor in the event of death, disability or unemployment or, in the case of credit property insurance, could not repair or replace the item financed (TV, etc.), but would still have the repayment obligation."

According to the CCIA, consumer credit insurance totalled $5.56 billion in net written premium in 2006. Of this total, credit life was $1.28 billion, credit disability was $1.43 billion, credit property $2.44 billion and credit unemployment was $41 million.

Credit insurance can be a lucrative business for those selling it.

The market for credit insurance is often described as "reverse competition," meaning you can be subject to overcharging because you don't get the opportunity to shop around for the best rates. The lender picks your coverages, premium and insurer, making you a "captive market" without choices. Therefore, it becomes up to state regulators to police the market to make sure borrowers aren't getting socked with whopping rates.

And in states where credit insurance is loosely regulated, insurers decide on rates based on how much profit they want to make, not on reasonable cost, according to the New York department of insurance (DOI).

"Such 'reverse competition,' unless properly controlled, results in insurance charges to debtors that are unreasonably high in relation to the benefits provided to them," says the New York DOI.

In every state, credit insurance forms must be approved by the state DOI. Some states have also established minimum "loss ratios," meaning how much an insurer must pay out in claims compared to how much in premiums it charges. Washington state, for example, enacted a law in 2005 that requires a 60 percent loss ratio; that means credit insurers must pay out at least 60 cents for every dollar in premium they take in.

Loss ratios vary not only but state but also by the type of credit insurance. For example, the Center for Economic Justice, a consumer advocacy group in Texas, reports that in 2004, credit life loss ratios varied from under 30 percent in Kansas, Louisiana, New Hampshire, North Dakota and South Dakota to over 55 percent in Arizona, Maryland, New York, Vermont and Virginia.

The most highly lucrative types of credit insurance are credit family leave and credit personal property. The CEJ puts the loss ratio for credit family leave at 0 — it is only a fraction of 1 percent. That means insurers are paying out less than one penny for every dollar in premium they take in, by CEJ estimates. The nationwide loss ratio for credit personal property insurance was 13 percent in 2004, according to the CEJ. There were even negative loss ratios in some states, which means insurers then had to release some loss reserves.

Burfeind of the CCIA says, "CCIA does not subscribe to the loss ratio standard for determining rate reasonableness. The pure loss ratio test falsely assumes that all business costs associated with credit insurance are directly and proportionately related to claims, i.e., if claims go down by 10 percent the so do all expenses components. Premium rates should not be excessive to consumers, but they also need to be adequate for insurers. The appropriate methodology, in layman's terms, is component rating. Under this approach, the various expense components, including claims, are valued for reasonableness and added together to get the rate."

Regardless of loss ratio, one of the worst deals going may be financed premium credit insurance. That's where your premiums are financed along with your loan principal, so the lender collects not only the profit on the insurance contract but also the interest.

Continue to Page 2: The basics of credit insurance: Do you really need it?