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Credit Life vs. Term Life Insurance

Cost Equation: Credit Life and Term Life Insurance

Periodically, credit insurance critics advise consumers to forego credit life insurance in favor of term life insurance.

Often, that’s misguided advice.

They fail to explain the difference between term life and credit life insurance.

The better explanation helps consumers compare value and cost to buy only as much insurance as they need or can afford.

We can agree that higher income consumers who can afford large amounts of life insurance probably do not need credit insurance.

We can’t agree that applies to most consumers.

We know when it comes to life insurance many consumers are uninsured or underinsured. Either they don’t have any or they have only a little. A 1999 study found that 25 percent of U.S. households have no life insurance at all.

If most consumers don’t have insurance or enough insurance, they do have debt. Total non-mortgage consumer debt in the U.S. rose to $1.5 trillion at the end of 2000. Repayment of about one-seventh of this debt ($212 billion) is protected by credit life insurance. With those numbers in mind, let’s look at the cost/value equation between credit life and annual renewable term life insurance.

We’ll compare:

  • credit life decreasing term insurance to insure the average-size closed-end loan protected by this kind of policy ($6,000) for a typical loan period of three years
  • to the cost for a $50,000 renewable term life insurance policy.

We’ll compare the costs for a three-year period.

We’ll make the comparison at a rate of 50 cents per $100 for credit life insurance and 30 cents per $100 of term life insurance plus a $25 annual policy fee.

We’ll use those rates because the one for credit life insurance is the average 200 I rate throughout the U.S. while the rate for term life is fairly typical and standard.

The total three-year credit life insurance cost would be $90.

The term life insurance would cost $175 the first year. Every year the rate and the cost for the term life may increase as the insured person ages.

The three-year cost of the $50,000 term life policy would actually add up to $475.

Because of the policy fee, a $6,000 term life insurance policy would have a three-year cost of at least $79, but no ordinary insurer would issue such a small amount.

If all you want or can afford is credit life insurance, then term life insurance simply does not meet your needs and credit insurance is the right answer.

On the other hand if you can afford the higher amount of term life insurance, and it meets all your life insurance needs – including debt repayment, then term life insurance may be the right answer for you.

Telling consumers to buy term life insurance instead of credit life insurance without knowing their individual circumstances is the wrong answer.

Only you know what you need and can afford.

The 2-Cents a Day Difference

Less Than 2 Cents a Day Preserves a Market

Two cents a day.

It’s the difference between the credit insurance market today and the market credit insurance critics want. It’s the amount they want to take away from the credit insurance industry by raising loss ratios to reduce rates. They say it would go to consumers. They’re wrong. It would be the cost of closing down the market.

Take away that 2 cents a day and you take away the credit insurance market.

You take away credit insurance from millions of people who want it. Periodically, critics issue reports saying credit insurance rates should be set based only on loss ratios. They say there should be a mandatory minimum loss ratio set at a number that translates into a maximum credit insurance rate of 40 cents for each $100 of coverage. In 2001 the national average rate for credit life insurance is 50 cents per $100 of coverage. What does this rate difference mean in real dollars to real consumers? The average size of a loan protected by credit life insurance is about $6,000.

At a cost of 50 cents per $100 of coverage, the cost for a credit life insurance policy to insure a $6,000 loan is $30 per year. That’s 8.2 cents day. If the cost were 40 cents per $l00 per year, the cost to insure a $6,000 loan would be $24 per year, or less than 6.6 cents a day. The difference? It’s $6 a year – less than 2 cents a day (1.6 cents per day). What does the less than 2 cents-a-day difference mean?

In the past 20 years, more than 200 companies left the market. There are 175 companies that still offer credit insurance. They know that less than 2 cents a day pays to keep the product in the market. The product pays for insurance premium taxes and regulatory fees to states, salaries and benefits for insurer employees, and for other fixed administrative costs. It includes the industry-wide profit of .4 cents per day (four tenths of one cent). Less than 2 cents a day is the difference between offering the product or maybe having to get out of the credit insurance business.

There are more than 47 million loans insured by credit insurance representing tens of millions of consumers who want the protection they get from it. Ask them if it’s worth less than 2 cents a day to make sure they can have it.

What would they say to less than 2 cents a day to preserve $6,000 of insurance?
They would say yes.
They already do.

5-Point Fact Check

Credit insurance has its critics, everything does. Here is what they say. Here is what we say.

They say it’s expensive.

We say, the cost for credit life insurance on a typical, average insured consumer loan of $6,000 is $30 a year. That’s inexpensive. In fact it’s less than the policy fee on most term life insurance policies.

They say consumers are forced to purchase credit insurance when they borrow and that the insurance is packed into the loan.

We say consumers have a choice. First, it’s the law that credit insurance is offered as a choice consumers make for themselves. Second it’s good business to give consumers what they want, but only when they want it.

They say credit insurance benefits to consumers should be measured by loss ratios.

We say consumers do not buy loss ratios, they buy benefits and credit insurance pays significant benefits as promised when they are needed. Credit life and disability insurance annually pay over $2 billion in benefits to consumers.

They say something they call reverse competition increases the cost of credit insurance through agent commissions.

We say credit insurance rates are regulated in every state. The amount insurers pay agents must be paid from within the regulated rate. The fact is the average sales commission on a typical, average credit insurance premium is $9 per year. Moreover, the commission doesn’t increase the state approved rate that a consumer pays.

They say credit life insurance should apply only to the amount borrowed.

We say it makes sense to provide coverage for the total amount that has to be repaid, including principal and interest, because the additional benefit can be applied to delinquent loan payments that often precede the death of the borrower or can be used to pay other estate expenses.

Credit Insurance Protects Home Loans

Credit insurance can protect repayment of second mortgage and home equity loans. When used this way it is usually offered as a single premium product. This means the insurance premium is paid in full and financed in the loan transaction.

Some credit insurance industry critics say single premium credit insurance cuts into home equity. They are wrong. It protects all the equity in a home.

Credit insurance on a mortgage loan protects the largest asset most consumers have – their homes. State and federal laws require many disclosures to consumers about credit insurance coverage of home equity loans including costs and length of coverage.

Well over 90 percent of second mortgage and home equity loans are retired, paid off or replaced within five years even though they are issued for longer periods up to 30 years. That’s why single premium credit insurance on home borrowing is almost always issued as a truncated policy, covering the first five years of the loan. Truncated coverage assures home loan protection during those crucial first five years and that keeps the premium cost down for homeowners.

When a consumer retires or refinances a home-secured loan,. any unused credit insurance premium is returned to the homeowner.

Over the life of a loan, credit insurance is no more or less a reducer of equity than any other product, service, or obligation that is paid for by borrowing against home equity over the life of a loan – whether the amount borrowed is used to pay for home repairs, education, debt consolidation, or credit insurance that protects all the equity in a home.

The 8-Cent Daily Cost

How We Spend 8 cents a Day

The average amount of new credit life coverage is about $6,000.

The national average rate across the nation for credit life insurance is 50 cents per $l00 per year of coverage.

That means a consumer pays $30 a year to insure a $6,000 loan – 8.2 cents a day.

This is how the credit insurance industry spends that 8.2 cents a day.

We pay out 3.5 cents for insurance claim benefits.
We pay 2.7 cents to lenders who serve consumers and us as sales representatives.
We pay 0.3 cents in taxes and fees.
We pay 0.4 cents in salaries and benefits to our employees.
We pay 0.9 cents for other administrative costs.
We keep 0.4 cents as profit.

The universal standard for insurance is that policy benefits must be reasonable in relation to the premium charged.

Is $6,000 of credit life insurance protection a reasonable benefit for 8 cents a day?

Is $6,000 of credit life insurance a reasonable benefit when the insurer profits by just 0.4 cents per day?

We think so.
Our customers agree. Every survey of credit insurance customers says they do.

Keeping Credit Insurance Available

5 Reasons to Keep Credit Insurance Available

Most consumers are uninsured or underinsured. Credit insurance is a low-cost means to let consumers protect their assets by insuring that debts are covered in the event of death, disability, involuntary unemployment or property damage or loss. In fact, credit insurance may be the only insurance many consumers have and they would be uninsured if it was not available.

Consumers always have the choice to choose credit insurance or turn it down. No one should take free choice away from American consumers. The more insurance choices consumers have the better off they are.

Compared with other coverage for life and disability, credit insurance is a convenient low-cost alternative that provides just the right amount of coverage to insure consumer debt. It is generally guaranteed issue or has very few underwriting limitations, and the cost does not vary depending on age, gender, occupation or smoking habits.

The real everyday cost of credit insurance in dollars and cents is low. It gives consumers a low-cost insurance option. It gives many consumers the only insurance option they can afford.

Credit insurance has been a consumer choice for more than 80 years. It has tens of millions of loyal, steady, satisfied customers who believe in it and want legislators and regulators to preserve the credit insurance choice.