The document discusses the complexities and potential pitfalls of credit-related life insurance, which is often overpriced and marketed misleadingly to consumers. It highlights the lack of competition in the sale of such insurance products at the point of credit transactions, leading to high premiums and excessive commissions for creditors. Consumers are urged to assess their individual needs for life insurance and consider purchasing policies in the competitive market rather than from creditors, as the latter's offerings often come with inflated costs and inadequate coverage options.

1. Active Capital Reinsurance | Credit-Related Life Insurance - Should You Buy
It?

2. Credit insurance is one of the most misunderstood and fraudulently marketed
products in the field of personal finance. The types of insurance sold by
creditors to debtors range from the old standard credit life and accident and
sickness insurance to such worthless contracts as "life events" which will be
explained below. Almost all of these policies are grossly overpriced and are a
source of substantial profits for lenders and sales finance companies.

3. The use of insurance as a type of security for a loan or other extension of credit
is not an inherently a bad choice. Both the creditor and the debtor can benefit
from removing the risk of death or disability from the equation. If the reduced
risk is a factor in providing a lower interest rate, or in basic credit approval, it
can be a win-win situation. The problem arises, however, when the creditor
intimidates or otherwise induces a customer to purchase an insurance product
not for its effect on risk but as an additional and substantial source of revenue.

4. Normally insurance rates are set by the competitive market, which tends to
hold rates down at least for the reasonably informed consumer who does some
comparison shopping. Automobile insurance companies, for example, are
highly competitive and the rates are seldom regulated. But in the context of an
application for credit there may be no competition at the point of sale of the
insurance. The creditor may be the only practicable source. The only
"competition" is between insurance companies to see who can charge the
highest premium and pay the highest commission to the creditor or its officers
for selling the coverage. This tends to force rates up rather than down and has
been dubbed "reverse competition".

5. During the 1950s as consumer credit was expanding rapidly and many states
had strict usury laws (laws limiting maximum finance charge rates) both
lenders and sellers began relying on commissions from credit insurance
premiums to pad the bottom line profits. Many engaged in selling excessive
coverage (not needed to pay the debt if something happened to the debtor) and
nearly all charged outrageous premiums, with 50% or more being paid to the
creditor or its employees, officers or directors as "commissions" for writing the
coverage. As incentives for paying as few claims as possible there were also
"experience refunds" awarded to creditors, which sometimes raised the total
compensation to 70% or more of the premiums. In addition, the premium was
added to the loan or unpaid balance of the sale price and finance charges were
charged on the premium.

6. Finally the National Association of Insurance Commissioners (NAIC) declared
it had had enough of the consumer abuse and model legislation was drawn up
and passed in nearly every state authorizing insurance commissioners to limit
the amount and cost of credit life and accident and sickness insurance ... the
two biggest sellers in the field. In some jurisdictions the legislation had very
little effect because the commissioners would not seriously exercise their new
regulatory powers, but in others the rates came down almost immediately.
Over a number of years where there was pressure from consumer groups the
rates on these two products reached a reasonable level ... with some states
requiring that the rates produce a 50 or 60 per cent "loss ratio"... ratio of
incurred claims to earned premiums ... and limiting commission payments to
creditors.

7. While this progress helped the consumer buying credit life and accident and
sickness insurance creditors soon realized that it was easy to develop new
products which were not regulated under the NAIC model law ... products such
as "involuntary unemployment insurance" to protect the consumer against job
loss and "unpaid family leave" insurance to make payments in the event of a
family emergency that required the debtor to have to leave his job temporarily.
Now, back to the question of whether you should purchase credit related
insurance in connection with your next transaction, that really depends on the
type of transactions, your individual circumstances and the kind of coverage in
question. The first question to answer before deciding who to buy credit life
insurance from is whether you need life insurance at all. The first step in the
answer is "Do I already have life insurance in sufficient amount to cover this
obligation and other needs?" If so it is obvious you don't need any more, and
the answer should be "No".

8. Life insurance is justified when (a) there are dependents to be cared for after
you are gone; (b) you have a moral obligation to a co-signer or co-maker or
guarantor ... possibly a family member ... that you will pay at least your portion
of an obligation, living or dead; (c) you own property or other assets which you
want to leave to someone upon your demise, and unless this debt is otherwise
paid the property may have to be sold to pay it; (d) you are buying something
important "on time", such as a home or an expensive vehicle, and don't want it
to be foreclosed or repossessed if you are not there to make the payments; or
(e) you and a partner have invested heavily in a business that depends on both
of you working, and you don't want your partner to suffer a hardship if you are
not there. There may be other reasons, but the point is that you must examine
your individual circumstances.

9. You do NOT need life insurance if you have no dependents, own very little and
are not leaving anything to anyone, and there is no co-maker to protect,
because your debts essentially die with you. No one will have to pay them if
you don't. And if there is no money to bury or cremate your remains don't
worry. Something will be done with them because public health requires it. If
you want an expensive send-off buy just enough to pay for the funeral and
name a beneficiary with instructions to use it for that purpose so your
creditors won't try to grab it.

10. If you want to make gifts to others when you die, perhaps to make up for the
mistreatment of them while you were around, life insurance is a very expensive "estate
substitute". It is better to put your money into savings than to pay it to some national
insurance corporation on the hope that you will profit by dying. With life insurance you
are essentially betting that you will die and the insurer is betting you won't.
Assuming you decide you need life insurance, the next question is whether to buy it
from a creditor or on the open competitive market. Most of the time it is best to
purchase a proper amount of term life insurance payable either to a beneficiary, or to a
trust for the benefit of minor dependents, or to your estate to be used to pay your last
rites and obligations. If you have it paid to a beneficiary, such as your spouse or
children, your creditors can not claim it for the payment of your bills ... unless you
designate a particular creditor as a beneficiary to the extent of your debt obligation. No
creditor has an insurable interest in your life except to the extent of your debt.

11. If you owe a mortgage debt on your home it may be wise to scale your term life
policy to approximate the amount of your mortgage so it will be paid off for the
benefit of your spouse and children if you, a provider, cannot provide. If you
have a car note you need to adjust your total life insurance amount to
discharge that obligation as well, so that whoever gets the car gets it free and
clear. If you don't care what happens to the vehicle don't worry about the
additional coverage. The creditor will take it and sell it and eat the balance. It
is theoretically possible for a sales finance creditor to sue an estate for a
deficiency after repossession but it very seldom occurs. It's just too much
trouble.
Aside from large obligations such as home mortgages and car notes there is
usually very little justification for buying life insurance, and certainly not from
a creditor. The premium rates on creditor-provided life insurance are much
higher, as a general rule, than the rates for other life coverage.

12. Credit life insurance comes in three varieties ... level, decreasing, and revolving. Level
life insurance begins and ends with the same coverage over the term and is normally
associated with single payment obligations. It is illegal in most states to sell level life
insurance on installment transactions. Decreasing credit life comes in two sub-varieties
... gross and net. Gross decreasing credit life begins with the "total of payments" (the
principal plus all interest you will probably have to pay over the whole term of debt)
and decreases by one monthly payment each month until it reaches zero at the end of
the term. Net decreasing credit life starts at the "amount financed" and declines as the
principal balance declines over the term. Usually net decreasing life is enough to pay
the obligation because it tracks the remaining principal, unless you fail to keep up with
the payment schedule and reduce the debt accordingly. Gross decreasing life will
normally be excessive at the beginning and less so as the term continues. For example,
if the principal is $10,000 and there will be $4000 in finance charges on a car note over
a six-year term, the insurance will start at $14,000, but during the first month the
debtor in fact only owes $10,000 plus a few days interest. This means that if the debtor
dies during the term the excess coverage should be paid either to the debtor's estate or
to a named beneficiary. In some states creditors are limited to net decreasing life plus
three or four months of payments just in case the account is in arrears at the time of
death.

13. Auto accident deaths create a unique insurance situation where credit life is
involved because the casualty insurance on the vehicle will often pay off the car
note leaving the credit life insurance to be paid directly to the debtor's estate as
a cash benefit. Millions of dollars of insurance benefits have been lost because
the surviving spouse was unaware of the double coverage on the note.
"Revolving account" credit life insurance usually involves a monthly premium
computed on the basis of the outstanding balance being billed. The premium
covers that amount for 30 days, discharging the obligation if death occurs
before the next billing date.

14. Unfortunately, national banks that issue credit cards have developed a scam to get
around the accusation of illegally high credit life premiums. Most of them if pressed
would take the position that since they are a "national" bank the states can not limit
their insurance premiums, even if the state also limits premiums charged by state
banks, but this legal position stands on shaky ground.
Many have issued their own policies in the form of "debt cancellation clauses" which
are amendments to credit card agreements under which the account balance will be
canceled if the debtor dies. But because of the risk that some state may clamp down on
their rate-setting practices they "bundle" the credit life with up to a dozen other
coverages, nearly all of which are not rate-regulated, so the charges produce a very
large margin of profit. They won't sell credit life alone, but require an "all or none"
purchase of the various components such as credit accident and sickness, involuntary
unemployment coverage, unpaid family leave coverage and even such weird products as
"college graduation", "having a baby", "retirement", "divorce" and other "life events",
each of which results in a month or two of benefits at the minimum payment level on
the account. These bundled products usually cost upward of $1.00 per $100 per month,
or twelve per cent per annum on top of the existing finance charge rate. Truth in
Lending does not require that additional 12% to be reflected in the annual percentage
rate, however, because the coverage is deemed "voluntary" and not part of the "finance
charge".