CREDIT LIFE INSURANCE can be useful to some consumers. Like other insurance, it provides protection against disaster. But when the buyer of a $5,500 automobile pays $900 in premiums for this and similar kinds of insurance, it becomes not protection but a rip-off.
The idea behind credit life insurance - and its companion, credit health and accident insurance - is simple. When you borrow money to buy a car, or anything else, you buy enough insurance to pay off the outstanding balance in case you die, or are disabled, before all the payments are made.
This kind of insurance ought to be, and generally is, cheap. Rates run about $6 a year per $1,000 for credit life nationally and somewhat lower than the in the District. Even in Virginia, where the transactions reported in Tuesday's paper took place, the rates are being reduced in July from $7.80 to $6 per $1,000. Low as they are, those rates are highly profitable. In Maryland last year, $3.5 million was paid in claims and $17 million collected in premiums.
How do you get from those rates to $511 or $900 in premiums on automobiles worth $5,500? People are sold not just insurance on their own lives but also on the lives of their spouses. They also buy health and accident insurance on themselves and their spouses. The result is a big premium and a package of insurance that provides them, and, not incidentally, the auto dealer, broad protection on the loan.
In addition, the dealer also gets the commissions - usually quite high - that the insurance company pays and the interest he charges for loaning the customer the money needed to pay the premiums. Add to that the new gimmick in Virginia where some dealers have set up their own insurance company and you have a method of making money not from the sale of automobiles, but rather from the sale of the insurance that goes with them.
The principal defense against this kind of abuse has to be better informed consumers. Government can't stop people from buying more insurance than they need - and it shouldn't try. But government can reduce the incentive for salesmen to see consumers more than they need by limiting sharply the commissions and by barring captive insurance companies like that of the Virginia dealers. Many state insurance commissioners have been urging steps along those lines for years. It is time for more legislatures to listen.