If you've ever had a consumer loan, you probably were asked to buy a life insurance policy that would pay off the debt in the event of your death. It's called credit life insurance.
It's also the "nation's worst insurance rip-off," according to two consumer groups -- the National Insurance Consumer Organization and the Consumer Federation of America.
"Consumers are overcharged more than $500 million annually for this insurance, and few consumers need it," said Stephen Brobeck, CFA's executive director.
The two organizations have been studying the credit-insurance issue for years. Here are some of their findings:
* Americans paid more than $2 billion in credit-life premiums in 1990, but only 42 percent of that amount was paid out in claims. The standard payout for other types of insurance is about 70 percent.
* In many cases, consumers are led to believe that credit insurance is required to get a loan. But state laws prohibit lenders from requiring consumers to buy such insurance.
* Most lenders add the insurance premium to the amount being borrowed. Therefore, consumers end up paying higher finance charges.
* Many lenders sell credit insurance to more than half of their customers.
* Some lenders get commissions of up to 50 percent for each policy they sell.
In releasing the report, the consumer groups said state regulators should force insurance companies to slash the premiums they charge for credit insurance.
"If the risk is very, very small, then the price should be low," Mr. Brobeck said. "The consumer is being gouged."
Meanwhile, he said, consumers should refuse credit insurance, especially if they have other assets or life insurance.
As part of a divorce settlement, a man agreed to pay his wife $42,000 to relinquish her claim to part of his military pension.
When the woman filed her tax return, she did not include the settlement as income. She said the payment should be tax-free under a law that says property settlements during divorce cannot be taxed.
The Internal Revenue Service disagreed, saying that because the military pension eventually would have been taxed, the woman could not escape payment by having the pension switched to a divorce settlement.
However, the woman won in tax court. A judge said that the tax-free exchange rule applied whether the transfer was for the relinquishment of marital rights, cash or other property.