WASHINGTON — Consumers who buy credit insurance when they take out a loan, buy a car or get a credit card are being overcharged by $2 billion a year, consumer advocate groups said in releasing a study Tuesday.
Consumers Union, which publishes "Consumer Reports" magazine, and the Center for Economic Justice, blamed state insurance regulators for what they said is lax supervision of credit insurance sales.
State regulators have expressed similar concerns about credit insurance rates and are looking into the matter, said Steve Larsen, spokesman for the National Assn. of Insurance Commissioners, which represents the regulators.
Although buying the insurance usually is not mandatory, the two consumer groups maintain that lenders often coerce consumers into taking it.
"We think [most] consumers should stay away from this product," Mary Griffin, insurance counsel for Consumers Union, said at a news conference. Credit insurance "is a bad deal and it's only getting worse," she said.
An exception, Griffin said, involves those consumers who live in states with cheaper rates for credit insurance or who are elderly or in poor health.
The states with the most unreasonable rates, according to the report, were Louisiana, Mississippi, North Dakota, Alaska, Nevada, Nebraska, New Mexico, Minnesota, South Dakota and Utah, in that order.
The rankings were based on average loss ratios for credit insurance in each state. The loss ratio is the ratio between the total amount paid out in benefits and the amount the consumer paid for the insurance.
The average loss ratio for all credit coverage was just 38%, meaning consumers received just 38 cents in benefits for each dollar they were charged in premium. By comparison, loss ratios for life and auto insurance were around 90% and 70%, respectively.
Many consumers already have life insurance policies that cover their debts if they die, and homeowners insurance often covers property losses, Griffin noted.
Janet Eissenstadt, a spokeswoman for the American Bankers Assn., agreed with that point. As with any financial product, consumers should examine whether they need credit insurance, and make sure to "read the fine print," she said.
Daniel Zielinski, a spokesman for the American Insurance Assn., the industry's largest trade group, had no immediate comment.