Clamping Down on Overcharges : Credit insurance should be regulated like other forms of insurance

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Credit life insurance is one of those obscure products that most consumers don’t buy unless they absolutely have to, but under the right conditions it can be useful. It is an insurance policy to pay off the balance of a loan--to a lender--if the borrower dies or becomes disabled. But because California is one of the few states that doesn’t regulate the premiums charged for such insurance, statistics indicate that many consumers are paying too much for it.

The California Department of Insurance reports that during 1989, the most recent year for which data is available, some credit life insurance policies paid out as little as 16 cents for every dollar of premium earned. That is in sharp contrast to the payout on auto insurance policies, where the payout averages more than 70 cents per premium dollar. Little wonder that Consumer Reports magazine has referred to credit insurance as “the quiet overcharge,” and advises against purchasing it.

Unfortunately, the manner in which credit life insurance is marketed often makes it hard for all but the most careful, or stubborn, consumers to avoid being overcharged. Some loan companies lead customers to believe they won’t get the loan they’re applying for unless they also buy credit insurance as part of the package.


If this were almost any other form of insurance the state insurance commissioner could step in, study the ratio of payouts to premiums and order premiums lowered if they were way out of line with actuarial data. But an outdated state law exempts credit insurance from regulation.

That will change if the Legislature enacts Assembly Bill 2107 by Assemblyman Lloyd Connelly (D-Sacramento). It would bring credit insurance under the regulatory authority of the state insurance commissioner. Even Consumer Reports concedes there may be times when credit insurance is useful--when borrowers are elderly, for example, or in poor health, and don’t want to saddle their heirs with debts. It can be a useful product, with a bit of regulation. AB 2107 would do just that.