For instance, a consumer purchases a car. The dealer arranges for the consumer to obtain a loan for the purchase, perhaps seller financing. During the transaction, the dealer encourages the consumer to purchase credit insurance as security, in case something should happen rendering the consumer unable to make the required payments on the loan. Not wanting to risk losing the family car should he or she become disabled or die, the consumer agrees to purchase credit insurance. The same pattern is often repeated in other credit transactions as well, including sales of consumer goods, mobile home sales, and residential mortgages.
Creditors have an incentive to sell credit insurance for several reasons.
There is incentive not only because the creditor is the primary beneficiary under a credit insurance policy, but also because the creditor receives significant compensation from the sale of insurance from the insurer whose product it sells, and because interest is charged when the creditor finances the insurance premium. Older Americans may be more susceptible than other consumers to credit insurance sales pitches. This is because they are more aware of their own mortality or risk of becoming disabled than younger people, and may perceive their overall risk of loss of income more keenly. Creditors are not unaware of this state of mind and in some circumstances might try to take advantage it. There are four basic types of credit insurance.