Unemployment insurance grows

Holly Marshall remembered how anxious she became about making loan payments when laid off from a job seven years ago. So when she was offered "involuntary unemployment insurance" as part of a car loan three years ago, she jumped.

The decision paid off: In November, Marshall lost her information technology job at Plato Learning, an online education software firm, and the insurance on her car payment kicked in.

"I had involuntary unemployment insurance on certain loans like my car. That saved me about $700 a month," she said. "I think that is something people often don't [buy], but to me it was so cheap. And I'd rather [pay the premium] than face a $350 a month car payment" while unemployed.

Marshall is one of 250,000 Minnesotans who lost their jobs in 2008, and with the grim outlook for the state and national economy increasing the anxiety level of all workers, credit insurers say they expect to sell more policies in the coming months.

Consumer advocates are skeptical of the value of such plans. Most people won't lose their jobs, meaning the policies are unnecessary. In addition, the range and period of coverage can vary widely from one policy to the next.

"For the majority of the cases that I have seen, it's a waste of money because people either forget they have it, or they unknowingly signed up for it or never really understood what it was," said Irene Ruiz, a credit counselor with LSS Financial Counseling Services. "And then in a couple of other situations, people actually have tried to use it after being laid off. And either they misunderstood the terms or they don't qualify for various reasons."

Still, with consumer debt levels at all-time highs, it only takes a brief period of unemployment for bills to mount, credit ratings to be wrecked and homes to go into foreclosure. Once little known and rarely used, credit insurance temporarily covers customers' monthly payments for car loans, mortgages, and credit cards should they lose their jobs.

Policies differ widely from one company to another in cost, coverage and the time span over which insurers are willing to pay certain bills.

Economists note that coverage may not be easy to come by, given the tighter underwriting guidelines that troubled AIG and many other financial institutions are using these days.

Regardless, interest is high.

"Definitely more people are buying it [once they learn] about it," said Jack Lundberg, consumer lending manager for Federal Highway Credit Union in St. Paul, which now sells the insurance on one of every five loans -- nearly 100 such policies in February alone. "People's ears definitely perk up when you say you have a product to cover unexpected unemployment."

Federal Highway said its plans can be bought for a credit card or a car loan, consumer loan or sometimes a home equity or second mortgage loan. Lundberg believes in the product so much that he buys the protection himself on each of his personal loans.

But not everyone's a fan of the industry. While credit counselors sometimes sway business to reputable firms such as Federal Highway, they say they and their clients have become irate with some other providers.

"We are getting an increase in volume of complaints," said Ben Wogsland, a spokesman for the Minnesota Attorney General's Office. "Typically, they call this type of insurance 'forced insurance,' because companies say: 'We will give you credit, but you first have to be insured"' for such things as death, disability and unemployment, he said.

Wogsland added that some forms of credit insurance, such as the unemployment insurance, "may have loopholes, so it's very important for the consumer to read the contract language and understand what they are buying. We encourage people to be very careful. Make sure they look very closely at the contract, check into the insurance company and make sure that [it is] licensed."

Lundberg echoed that concern. He noted that prices and policies for the protection are "all over the map" and each one has certain restrictions. Some charge $1.50 a day or $45 a month to cover a car note for six months. Others charge $9 a month per $1,000 of a credit card debt and yet only agree to pay the customer's monthly minimum payment in the event of job loss. Still others charge $2 a month for the same coverage, he said.

Wells Fargo Financial's debt cancellation products pay a customer's monthly home equity, credit card or other personal installment loans for six months, but only after the customer has been out of work 30 days. The cost? 89 cents for every $100 of the ending monthly balance, said spokeswoman Peggy Gunn.

The credit union won't sell the coverage to customers over age 70 and it refuses to sell the unemployment piece without first selling life or disability credit products.

Such limitations help lenders limit their risk, economists note. Highway Federal actuaries reported that customers' unemployment claims recently rose 55 percent.

Ruiz of LSS Financial Counseling Services said about 10 percent of her clients buy credit insurance. But based on what she sees, she can't recommend it wholesale because the coverage varies so widely.

"If it covers you for a month, that may be a waste, because in this market you are not going to find a job in one month, typically," Ruiz said. "But if it covers you for a year, then that is great. That gives you plenty of time to have the relief of those payments. The consumer just really needs to educate themselves and see if it is going to be right for them."