Credit Insurance Costly, but Valuable for Some
Credit insurance--typically life or disability coverage tied to payment of a specific loan--is known in the industry as a convenience product, sold right along with the loan itself, or easily ordered by mail. Such convenience may be costly, however, involving comparatively high premiums for limited coverage over short periods.
For many consumers, this special coverage may be unnecessary. “If you already have a half million in life insurance,” says State Farm Life Insurance actuary Terry Huff in Bloomington, Ill., “why do you need this to cover a $15,000 auto loan?”
Indeed, it’s the comparison with “regular” insurance that makes these special coverages seem expensive. Credit life coverage for a four-year, 12.5% auto loan of $10,000 would cost $51.48 each year, if priced at 30 cents per $100 per year (the rate is applied to the total repayable amount of $13,519.68, with the resultant charge added to the principal and financed as well).
“People figure it’s only peanuts,” says Los Angeles insurance agent Mark Hendler. But for little more money, he says--$54.50 a year, plus a one-time policy fee of $25--a male non-smoker aged 35 could have $50,000 of life insurance for the same four years.
Similarly, a bank-card offer of credit life, disability, and involuntary unemployment coverage for 60 cents per $100 of balance could cost $30 a month, or $360 a year, for a constantly outstanding balance of $5,000. Insurers say the life coverage is probably a tenth of the cost, or $36; for slightly more than twice that (the $79.50 policy above), the 35-year-old male non-smoker could have five times the coverage.
Difference in Cost
There are simple explanations for this difference. First, the consumer is buying insurance a la carte, covering financial obligations--auto loan, credit card balance--one at a time. “You’re buying small amounts of insurance for specific things,” says Huff, “when you’d be buying more efficiently if you were covering your life as a whole, considering all your debts, your earning power, any future obligations like a child’s education. We have very inexpensive policies when you get into higher amounts.”
In many cases, the consumer’s also buying into group policies that lump together old and young, healthy and risky, charging them equally. There’s little or no underwriting (investigation and rating of applicants), and the policies are priced to accommodate all risks, making them expensive for some, a bargain for others (about which more later).
There is, moreover, little competition to lower prices: each lender is wooed by insurance carriers offering compensation for his endorsement. This system (called “reverse competition”) may keep prices high for the ultimate consumer, who doesn’t “go out and get quotes,” says Huff. “When you pick a lender, you take what he offers in terms of a group.” (One exception is mortgage life insurance, because “there’s some pressure being exerted by the market,” says life insurance actuary James Hunt, former Vermont insurance commissioner. “Every time a deed’s recorded, there are insurance agents hustling out to sell you whole life insurance.”)
The actual comparison of products is less simple. It’s all very well for the consumer to decide he’ll “test the open market” (Hunt’s words) before buying credit insurance, but who can actually do it?
There are just too many factors, barely comparable. People with little experience as insurance-buyers may have to compare cost per $100 value (credit products) with cost per $1,000, including policy fees (term life), or packages of life, disability and unemployment coverage with packages of life and disability alone, or policies whose benefits stay fixed while premiums increase with customer age (term life) with policies whose premium is fixed while benefits decrease with the loan balance (mortgage life).
Trace the Costs
They’ll have to “trace the costs of each coverage through the length of the loan they’re covering while figuring how much protection they need for how long,” says John Hannon, Prudential Insurance vice president in Roseland, N.J.
Those who already have some insurance, perhaps term life, and find it inadequate to cover a new loan or mortgage, may also be weighing whether to buy more term life, or one of these special products. Term life rates can indeed be much lower, but only for higher coverages, and “only if it’s all bought at one time,” warns Hannon.
One might also trust, blindly, in a few prevalent generalizations, and hang the fine analyses. Given the a la carte rates and the pools of differing risks, younger people who can buy insurance in comprehensive amounts at low rates, probably should. Conversely, credit insurance could be a good buy for someone otherwise deemed uninsurable because of age or medical problems, and charged accordingly.
Similarly, the person who “has neither the inclination nor chance to shop for insurance,” says Huff, might find convenience outweighs price. “If you need insurance,” he says, “go see an agent. But if you’re not willing to do that, get the credit insurance.” If only because it’s there.
