Credit-Related Life Insurance
One of the most confused and fraudulently advertised goods in the world of personal finance is credit insurance. The forms of policies offered to debtors by banks vary from the traditional traditional credit life and injury and illness insurance to “life events” that will be discussed below, such as void contracts. Almost all of these policies are massively overpriced and are a source of considerable income for lenders and firms who fund purchases. Visit Miller Hanover Insurance – Hanover life insurance.
Using insurance as a form of coverage on a loan or other credit extension is not necessarily a weak alternative. Removing the probability of death or injury from the calculation will help both the borrower and the debtor. It may be a win-win scenario if the decreased risk is a consideration in the availability of a lower interest rate or in the simple loan acceptance. However, the issue occurs where the creditor intimidates or otherwise forces a buyer to buy an insurance policy as an additional and significant means of income, not because of its risk effects.
Insurance premiums are usually determined by a dynamic sector, which helps to maintain rates down, at least for a fairly educated customer who performs any comparable transactions. For example, car insurance providers are extremely competitive and premiums are rarely regulated. However, there could be little rivalry at the point of sale of insurance in the case of an order for credit. The only practicable source could be the borrower. The only “competition” is between insurance providers to see who will offer the maximum price and give the borrower or his officers the highest commission for the coverage to be offered. This appears to push prices up rather than down and “reverse competition” has been named.
When consumer lending grew exponentially during the 1950s, and several states had stringent usury rules (laws regulating overall finance fee rates), both lenders and dealers started to focus on credit insurance premium commissions to pad the bottom line earnings. Most were interested in offering excessive coverage (not sufficient to settle the loan if anything happens to the debtor) and virtually all charged outrageous rates, with 50 percent or more being billed as “commissions” for writing the coverage to the borrower or his staff, officers or directors. There were also “experience refunds” offered to borrowers as offers to settle as little claims as practicable, which often increased the gross payout to 70% or more of the premiums. Furthermore, the premium was attached to the debt or the outstanding amount of the selling price and the premium was compensated for financing costs.
Finally, the National Association of Insurance Commissioners (NAIC) announced that it had ample market abuse and model law was drawn up and enacted in almost every state allowing insurance commissioners to regulate the volume and expense of credit life and injury and illness insurance… the two main vendors in the sector. The act has relatively little impact in some counties since the commissioners did not seriously exercise their expanded administrative authority, but the prices fell almost entirely in others. The pricing on these two goods hit a fair amount for a period of years where pressure from customer advocates was applied… with certain states forcing the prices to achieve a 50 or 60 percent “loss ratio”….ratio of incurred claims to received premiums….and restricting creditors’ fee payments.
Although this advance helped the customer purchase credit life and injury and illness insurance borrowers quickly discovered that innovative goods that were not governed by the NAIC model law were quick to create… products such as “involuntary unemployment insurance” to shield the consumer from work loss and “unpaid family leave” insurance to allow compensation in the case of a family disaster.