WASHINGTON -- The credit life policies that banks and others sell to borrowers are an "insurance rip-off" that consumers should almost always reject, two prominent advocacy groups said on Wednesday.

The Consumer Federation of America and the National Insurance Consumer Organization said they found in a study of the industry that credit life policies pay out only 42% of premium dollars in claims, well below the 70% the groups said is reasonable. The rest goes for commissions and overhead.

A lender typically makes a 35% commission from the sale of a credit life policy, the two groups said.

Just Say No

The two groups urged states to tighten regulations, but in the meantime said consumers should simply say no when banks, finance companies, and auto dealers try to sign them up when the loan is made.

Consumers are being overchanged by more than $ 500 million a year," said Stephen Brobeck, the consumer federation's executive director.

In addition, he said, most lenders make such inadequate disclosures to consumers that many borrowers don't realize they have purchased credit life.

Exceptions to the Rule

Mr. Brobeck cited two exceptions: Credit unions, which are member-owned cooperatives, and for-profit lenders in a handful of states where the payout ratio is greater than 50%.

Only the District of Columbia, New York, and Maine have payout ratios of 60% or more, the model standard set by the National Association of Insurance Commissioners. All three states regualte the product heavily.

Arizona, California, Maryland, New Jersey, Oregon, Pennsylvania, and Vermont also maintain payouts of more than 50%, the consumer groups said.

Carl Zeitz, executive director of the Alliance for Consumer Credit Insurance Inc., an organization sponsored by credit life underwriters, said the product makes sense for many people and is usually reasonably priced.

"There's no underwriting involved," he said. "You don't have to get a medical exam or have your blood tested, and nobody's is going to ask you if you smoke."

The average credit life policy backs a loan of no more than $ 4,000, he said, and consumers typically pay 4 2.50 a month for the coverage.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.