AIRC 421 Module 1 Lesson 4 Lesson Summary

Credit life insurance pays off a borrower's debt if they die before repayment, with lenders acting as both sellers and beneficiaries of the insurance. Borrowers cannot be denied credit for not purchasing insurance from the lender and can choose any licensed insurer. Regulations exist to ensure transparency and fairness in credit life insurance, including limits on coverage amounts and requirements for reasonable loss ratios.

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AIRC 421 Module 1 Lesson 4 Lesson Summary

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Shiji Mathew

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AIRC 421 Module 1 Lesson 4

Regulation of Credit Life Insurance

Summary of Key Points

Credit life insurance provides funds to pay all or part of a debt that a borrower owes under a
credit transaction if the borrower should die before repayment.

One unique feature of credit life insurance is the role of the lender, who
 Sells credit insurance to the borrower (and receives a commission from the insurer)
 Under a group credit life policy, is both the group policyholder and the policy beneficiary
 Chooses the credit insurer and the coverages that the borrower may select

A lender cannot deny credit to a person because he does not buy credit life insurance from the
lender. If a credit agreement does require the borrower to have some form of insurance, he may
buy credit life insurance from any licensed insurer.

Credit transactions are structured as either a

 Closed-end credit transaction (Example: a car loan)
 Open-end credit transaction (Example: a credit card arrangement)

For open-end credit transactions, lenders generally charge premiums on credit life insurance
coverage at a specified rate per $1,000 of the monthly outstanding balance (MOB).

Most states have enacted laws based on the Consumer Credit Insurance Model Act, which
covers loans and credit transactions for personal, family, or household purposes.

Some states have adopted regulations based on the Consumer Credit Insurance Model
Regulation, which provides standards for the sale of consumer credit insurance.

Federal consumer protection laws also govern consumer credit transactions (Truth in Lending
Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Federal Trade Commission Act).

The Consumer Credit Insurance Model Act requires individual credit life policies and group
certificates to include certain information and provisions, including
 The insurer’s name and address
 A description of the amount and terms of coverage
 A free-look provision
 The premium amount the borrower must pay (and, for open-end loans, the premium rate
and how the insurer will calculate the premium)
 A benefit payment statement

Most states limit the amount of credit life insurance coverage to the total amount of the borrower's
debt. According to the Consumer Credit Insurance Model Act, the amount of credit life insurance
coverage cannot exceed the greater of
 The scheduled net debt—the amount needed to pay off a debt according to the credit
agreement's repayment schedule
OR
 The actual net debt—the amount needed on any given date to pay off the debt but does
not include unearned interest or finance charges.

Credit life insurance coverage usually continues until the scheduled payoff date. It may terminate
prior to that date in certain situations, such as when a borrower repays a debt before the
scheduled payoff date or refinances a loan.
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Credit life insurance benefits must be reasonable in relation to the premiums charged for the
coverage. In most states, this requirement is met if a product may reasonably be expected to
develop a loss ratio of at least 60 percent.

The loss ratio measures the percentage of premiums paid out in policy benefits and is expressed
as
Loss Ratio = Total Claims Incurred ÷ Total Premiums Received

To determine what premium rates satisfy the loss ratio requirement, most state insurance
departments have schedules that define the prima facie premium rates that may be charged for
each type of credit insurance.