Americans are being overcharged more than $900 million a year for the credit life insurance that they buy when making installment purchases of cars, furniture and appliances, the Consumer Federation of America said Monday.
This is the "nation's worst insurance rip-off," said a CFA study showing that only 43% of the premiums collected are paid out in benefits, compared to about 75% for regular life insurance.
"Borrowers either don't know they've purchased the product, think it is required, or are manipulated . . . by sellers," said Stephen Brobeck, executive director of the CFA, a nationwide federation of 240 consumer groups.
Payout-ratio regulations are set by state insurance commissioners. Consumers in Maine and New York must receive payouts equal to at least 70% of the premiums collected by the industry. Alabama and Louisiana regulations give those states' consumers just 22%. California regulations require a payout of 55%, the study said.
The purchase of credit life insurance on installment contracts is voluntary. And Brobeck said at a news conference that "we're urging people to carefully consider whether they need insurance. If they consider it, most will reject it. It's so much cheaper to go to their regular life insurance agent and get another $10,000 in coverage," he said.
The CFA study dealt with consumer installment purchases such as cars and home furnishings. It did not consider life insurance on home mortgages. Mortgage lenders may require life insurance when the buyer is making a down payment of 10% or less of the purchase price.
The CFA prepared a national study of credit life insurance, looking at state requirements for payout ratios. In 1988, consumers paid $2.1 billion in premiums, but received payouts of only $903 million, or 43% of the premiums.
If state insurance commissioners had imposed payout levels of 75% on the insurance, the amount collected in premiums would have been required to be considerably lower. Premium payments by consumers would have been cut by $910 million for the same amount of coverage, according to the study by the CFA and the National Insurance Consumer Organization.
The credit insurance industry disputed the report. It added that it serves customers who might not otherwise get insurance.
"It sounds as if they have simply dusted off an old report for re-publication," said William Burfeind, executive vice president of the Consumer Credit Insurance Assn., which represents 200 firms in the business.
The life insurance industry suggests that a person have insurance equal to five to seven times annual income, but the average consumer is "grossly" under-insured, with coverage of $50,000 to $60,000, Burfeind said.
"The consumer who is adequately or substantially insured is not the consumer who is buying credit insurance," he said. "The buyer is the one who cannot afford ordinary insurance products because of the minimum policy purchase requirements. He is in a market segment not being serviced by the ordinary (insurance) agency force."
Some big companies sell credit life insurance, but the industry is dominated by smaller firms specializing in the business. The cost to consumers varies significantly.
The CFA study compared prices for credit life charges on a 48-month, $10,000 loan with a 12% annual interest rate.
A consumer in Maine would spend $123 for the insurance if it were purchased in a single premium payment, or $155 if the premiums were paid over the life of the loan. The highest charge--in Alabama and Louisiana--would be $533 for a single premium, or $674 over the life of the loan.
Californians would pay $206 in a one-time charge, or $260 during the loan's full duration.
Many of the larger firms belonging to the American Council of Life Insurance have left the credit life insurance business. "We agree the consumer should be better educated and a lot of people don't need this kind of insurance," said Benno Isaacs, a spokesmen for the trade organization. "If they have a good life insurance policy, they don't need it."
Most consumers are "already protected by other life insurance policies or other assets," the CFA study said. "The families of those with neither may have higher priorities than repaying the debt if the borrower dies."
States should "require that, at minimum, 70% of premiums be paid out in claims, and they must enforce this standard," said Bob Hunter, president of the National Insurance Consumer Organization.
The National Assn. of Insurance Commissioners has proposed a model regulation calling for a 60% loss ratio. Only four states have reached or exceeded this standard: Maine, 71%; New York, 70%; Vermont, 65%, and New Jersey, 62%.