IT USUALLY happens just as you finish the application papers for your loan. The salesman leans over the desk, smiles, and asks "You'll want credit life insurance, right?"
Well of course, you reason: You don't want your spouse or heirs to get stuck paying off your loan if you die. Besides, what is a few dollars a month added on to your loan payment?
"While we're at it, you'll need some credit disability insurance in case you are laid up," the salesman says.
Not so fast, consumer advocates say: Do you need more insurance, and is this the best way to buy it?
Two national consumer groups recently began a campaign to get state legislatures to enact stricter regulations on credit life insurance. The Consumer Federation of America and the National Insurance Consumer Organization argue that in most states credit life is a terrible buy when compared to cheaper term life insurance.
But lenders and insurance companies that sell credit life in New York say that this state's strict regulation of the product make it a decent buy because the state makes insurers return a high proportion of premium dollars to consumers in the form of benefits.
Consumers who borrow money should understand the arguments on both sides before making up their minds on how to handle their insurance needs.
Although both credit life and ordinary life insurance promise to pay a certain amount of money upon the death of the policy holder, there are important differences between the two.
First, consider ordinary life insurance.
When buying ordinary life insurance, you purchase a fixed death benefit and you get the full amount of that benefit when you die. Insurers charge various rates, depending on the policy holder's age, sex, and health.
Many insurers require medical examinations before issuing the insurance. Some applicants will be turned down because of their health.
Credit life is different. It promises only to pay off the remaining balance of a loan if you die. If you get a $10,000 car loan and die the next day, the policy will pay off the $10,000 balance. If you die three years later and owe only $3,000, the policy will pay only that balance.
Most forms of credit life do not require a medical examination. The same rates are charged to all buyers, regardless of age, sex or health.
Premiums are not paid annually, as with ordinary life insurance, but monthly over the life of the loan. In effect, the borrower finances the premium, and pays a small amount of interest on it.
The biggest complaint of the two consumer groups was the average payout in most states -- in many, consumers get back in death benefits less than half the money they paid in premiums.
In auto insurance, for instance, consumer groups complain when insurers keep more than 30 percent of premiums. The national average for credit life, however, is 57 percent, the two consumer groups say.
New York has the second-best record in this area: the state mandates that insurers keep no more than 35 percent of premiums, and the actual average in 1989 was only 22 percent, says John Calagna, a spokesman for the state Insurance Department. That means 78 percent of the premiums in 1989 flowed back to credit life buyers in the form of death benefits.
Much of the portion of the premium that does not go back to consumers ends up paying for the expenses of the insurance company that issued the insurance, for state insurance tax, and for administrative costs, says James Bedard, assistant vice president for consumer marketing at M&T Bank.
Does that make it a good buy? Not necessarily, the Insurance Department says.
"We have generally said over the years there are better products to buy that would cover you for all your needs," Calagna says. "You are better off with a comprehensive life policy."
Robert Hunter of the National Insurance Consumer Organization agrees.
In New York State credit life "is a fairer buy, but it's not a good buy," he says. "For most people who have a need for life insurance, this is not the way to get it."
He recommends an inexpensive term life policy that will give your family enough money to pay all their bills after you die, rather than buying policies to cover each specific purchase.
"Doing that is like buying toothpaste a squeeze at a time out of the tube," he says.
Buying a credit life policy "lulls people into thinking of their financial situation in a fragmented sense," says Anthony J. Ogorek, an independent financial planner in Williamsville. "Insurance on your home mortgage can give you a false sense of security. It may pay off the mortgage but it won't heat the house."
Bedard at M&T says consumers usually do not keep their insurance coverage at ideal levels, and credit life provides a convenient financial backup for them.
Often, for instance, a couple will buy life insurance when they get married. Over the years they accumulate assets and debts, but don't make adjustments in their insurance coverage to compensate, he says.
Credit life provides a convenient method of making up for this lack of coverage, he says.
Another advantage of credit life insurance is that not every consumer may qualify for ordinary life insurance because of their age or health, says James Coffey, insurance products manager at Chase Lincoln First Bank.
Anyone can purchase credit life insurance when they borrow money. For some purchasers, credit life is the only type of life insurance they can buy.
Most consumers can get ordinary life insurance when they need it, however, says Michael Halloran, general agent in Buffalo for Northwestern Mutual Life. Less than 3 percent of applicants are turned down, he adds.
In most cases it is better to buy one policy to cover all your needs, he says. That way, your spouse or heirs can decide what to do with the money from the insurance proceeds.
A working spouse, for instance, may decide against paying off the mortgage because he or she still wants a mortgage interest deduction against income taxes, he says.
Coffey at Chase Lincoln cites another advantage of credit life: Coverage begins the moment you sign your application. Regular insurance policies often include waiting periods.
Despite the debate over credit life, the majority of consumers continue to buy it when taking out loans and industry surveys have shown that most buyers were satisfied with their coverage and would purchase it again on another loan.
At M&T the majority of personal loans include credit life purchases. At Chase Lincoln, more than half of all borrowers buy it.
The consumer groups want the states to begin an education campaign to explain to consumers that there are other options to credit life. They would consider such a campaign a success when no more than 25 percent of loan applicants purchase credit life, Hunter says.