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Group credit insurance is a type of insurance given to creditors — businesses that give customers credit cards or loans — to help pay for outstanding debts. This is much like life insurance, because it typically pays businesses if debtors die, but it also may cover disability or unemployment. Unlike credit insurance, which only covers one debtor, group credit insurance covers a whole group of debtors. Most creditors will push some or all of the insurance costs onto customers, which will appear as a small fee on the loan or credit card. Without having this insurance, the creditors would have to sue a deceased debtor's next of kin for the money or lose money on the outstanding debt.
Creditors make money through interest charged on loans and credit cards and, when outstanding debts cannot be paid because the debtor is dead or disabled, creditors can lose substantial revenue. To alleviate this, most creditors use group credit insurance. Commonly, this policy only pays if the debtor dies or becomes severely disabled and cannot work to make money. Some policies also may cover against a debtor who can no longer pay creditors because of extended unemployment, but this is rare.
In a broad sense, credit insurance comes in two main policies. Individual credit insurance is taken out against a single person and is commonly used by small creditors that do not have many debtors. Group credit insurance covers an entire group of debtors. Group policies' coverage usually only goes so far, whether the limit is based on the number of people or the total amount of their debt, so creditors may require several policies.
Group credit insurance tends to be expensive, especially if high-debt people are being covered, so creditors tend to offset some or all of the costs onto customers. For example, creditors may charge a small fee to credit cards so the debtor pays for his or her allotment of the insurance costs. Some creditors do this, while others do not, but the charge is common because creditors typically do not like to lose money.
Without group credit insurance, it can be difficult for creditors to receive their money on outstanding debts and loans. Creditors normally sue next of kin if there are any and they are able to pay. In a worst-case scenario, when there is no one to sue or to collect from, creditors lose out on the outstanding debt. Creditors typically cannot afford many cases like this, so group credit insurance is common.
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