By Joan Cleveland
In the financial services industry, it is widely known that credit life insurance pays off the outstanding loan balance to which it is attached. But have you ever really realized how credit insurance is a key component in serving American households who may have no life insurance at all—that is, up until the point where you, the lender, offer it?
According to LIMRA’s 2016 Life Insurance Ownership Study, 37-million households don’t own any life insurance coverage whatsoever. In addition, more than 10% of all U.S. Households said they would have trouble covering everyday living expenses after several months if the primary wage earner died. I think it would be safe to assume that the primary wage earner was definitely the borrower or co-borrower on their existing loans.
When life insurance is sold in a more traditional format, the first step is to determine what the individual’s needs are with the first question usually being “what are your outstanding loans?” Most often, the mortgage is first, closely followed by auto loans, home equity loans, credit card balances, and perhaps any personal loans. Hopefully, the following is no surprise to you—these are all loan types, with the exception of first mortgages, to which credit insurance can be added at the time the loan is originated!
Affordable Loan Protection
Now, pundits say that credit insurance is expensive when compared to individual term insurance so let’s explore that a bit more. Individual term life insurance is generally priced by age, gender, smoking status, and current health. Meanwhile, credit insurance is generally priced based upon the lender’s eligible loan portfolio, current penetration rate (loans covered with credit insurance/all outstanding loans), the lender’s historic loss ratio, and the approved rates for the state in which the loan is funded.
The credit insurance application can range from a minimal actively at work question to a multitude of medical questions. Individual term life coverage can range from the same actively at work question to a multitude of medical questions to a full blown medical exam. Due to the more extensive medical review for term life coverage, many individuals that would be rated or even declined for traditional life insurance can, in fact, obtain traditional credit insurance.
The average size loan protected by credit insurance is roughly $6,000. At a rate of $0.50/100, the annual cost of credit life insurance is approximately $30 per year. You will be hard pressed to find an individual life insurance policy that can be underwritten for less than $25,000 of coverage, and the typical annual policy fee (which is in addition to the premium) ranges from roughly $50 to $100—more than the annual cost of credit insurance on the loan the first year.
In addition, credit insurance coverage declines with the outstanding balance of the loan so the actual cost for credit insurance reduces each and every month. Couple this information with the fact that more households who believe they need more life insurance say the reason they haven’t purchased is because they have not been approached by a financial professional about doing so. Your loan representatives are clearly a financial professional, representing the consumer’s trusted financial institution.
The bottom line is that lenders can play a significant and effective role in helping uninsured and underinsured Americans.
Joan Cleveland is with SWBC. This article was originally posted on SWBC’s LenderHub at blog.swbc.com.