Payment Protection Products
Every year, millions of U.S. households protect their family finances with voluntary credit insurance or debt cancellation or suspension agreements.
These debt protection products provide valuable protection to a consumer when borrowing through a bank, credit union, or other lender that offers them.
Debt protection benefits can include:
- A death benefit that pays the outstanding loan balance
- A disability benefit that pays monthly loan payments while the borrower is disabled
- An involuntary unemployment benefit that pays up to six to twelve monthly loan payments while the borrower is involuntarily unemployed
Regulation of debt protection products is strict
- Credit insurance is regulated under insurance statutes and overseen by the 50 state insurance departments. The departments must approve all insurance policies, applications, and rates or price. They also may audit for insurers and producers’ compliance. The Truth-In-Lending Act (15 U.S. Code § 1601 and Regulation Z (12 CFR Part 1026 also have disclosure requirements for lenders to ensure transparency for customers about credit insurance prices, its benefits, that it is optional when taking a loan, is cancelable at any time, has few eligibility requirements, and is not included in calculating the cost of credit to the consumer.
- Debt cancellation and debt suspension agreements are part of the lending agreements and are regulated by the lender’s governing body – the Office of the Comptroller of the Currency (OCC) for national banks, Office of Thrift Supervision (OTS) for thrifts, National Credit Union Association (NCUA) for credit unions, the State Banking Department for state chartered institutions, and other various state agencies for non-depository creditors. Consumers are afforded the same protections as credit insurance by these federal agencies and their regulations.
Debt protection products help household finances today and tomorrow
- Helps households stay current on their loan(s), thereby avoiding delinquency and default today, and helping with the future cost of credit. FICO estimates that if a consumer’s credit score is 680 and a consumer becomes 90-days delinquent, then the consumer’s credit score will drop 60 to 80 points to 600-620 on average and as low as 530. Since credit insurance covers multiples of the critical 90-day delinquency trigger, clearly it helps borrowers with their costs of [future] credit.
- Just like auto or homeowner insurance, debt protection provides peace of mind: even if you never use it, you know it’s there to help you through a financial shock.
Consumers make thoughtful, informed purchases[i] of debt protection products
- 96% of purchasers indicated recollection of their purchase
- 96% of purchasers reported the lender had explained the terms of the product.
- 100% knew that purchasing a debt protection product was optional.[1]
Consumers like what they bought, and will buy again
- 85% of installment loan borrowers indicated debt protection products are a good idea (a consistent rating over 40 years)
- 70% of purchasers would purchase a debt protection product again.[2]
U.S. household finances are fragile and need debt protection
- 65% of adults said that changes in the prices they paid compared with the prior year had made their financial situation worse, including 19 percent who said price changes had made their financial situation much worse.[3]
- Among the 37 percent of adults who would not have covered a $400 emergency expense completely with cash or its equivalent, most would pay some other way, and 13% said that they would be unable to pay the expense at all by any means.[4]
- In 2023, 54 percent of adults said they had set aside money for three months of expenses in an emergency savings or “rainy day” fund—unchanged from 2022 but down from a high of 59 percent of adults in 2021.[5]
- 49% of Americans would find it difficult or somewhat difficult to meet their current financial obligations if their paycheck was delayed for one week[6]
U.S. households are underinsured
- Only 52% of American adults report owning life insurance, and 41% of adults — both insured and uninsured — say they don’t have sufficient life insurance coverage.[7]
- Only 52% of American adults report owning life insurance, and 41% of adults — both insured and uninsured — say they don’t have sufficient life insurance coverage.[8]
- 65% of the private sector workforce has no long-term disability insurance.[9]
- Just over 25% of today’s 20 year-olds will become disabled before reaching age 67.[10]
- Around 5.0% of working Americans will experience a short-term disability (six months or less) due to illness, injury, or pregnancy on average every year. Almost all of these are non-occupational in origin.[11]
[1] Durkin, Thomas A., and Gregory Elliehausen (2017). “New Evidence on an Old Unanswered Question: Why Some Borrowers Purchase Credit Insurance and Other Debt Protection and Some Do Not,” Finance and Economics Discussion Series 2017-122. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2017.122. Four similar Federal Reserve System reports have been published from 1977 to 2012.
[2] Ibid.
[3] Board of Governors of the Federal Reserve System, “Report on the Economic Well-Being of U.S. Households in 2023 Link
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] LIMRA, 2023 Insurance Barometer Study, link
[8] LIMRA, 2023 Insurance Barometer Study, link
[9] [9] Social Security Basic Fact 2023, link
[10] Ibid.
[11] Council for Disability Awareness, Disability Statistics 2021 link
