Credit Insurance?

Credit insurance is designed to fulfill a borrower’s loan obligation in the event the borrower dies or becomes disabled. The underlying loan, on which the need for the insurance derives, strongly influences the credit insurance product. The conditions and terms of the loan determine many of the characteristics of the credit insurance coverage.

Credit Life Insurance Plans

Credit Life Insurance is a Term Life Insurance purchased in conjunction with a consumer credit transaction, excluding first mortgage loans, which provides a death benefit sufficient to pay off the credit obligation in the event of an insured’s death during the term of the coverage. A consumer credit transaction includes cash loans, instalment sales contracts, and credit card borrowing.

Typically all Credit Life Insurance Plans may provide single life or joint life coverage and may be issued under a group or an individual policy. Coverage begins on the effective date of the loan and terminates on the maturity date of the loan, except where noted. If the loan is repaid prior to the expiration of the insurance term, the insurance terminates. Here are some typical characteristics of today’s credit life products:

 

Single Premium Decreasing Gross Coverage – is where the insurance provided is uniform decreasing term insurance with an initial amount equal to the initial gross indebtedness. Insurance decreases each month by the amount of the one monthly payment. During the loan term, the amount of insurance is equal to the sum of the remaining monthly payments. This is the most common form of credit life insurance, since it is used for most closed-end installment loans.

 

Single Premium Level Gross Coverage – term coverage is provided with an amount of insurance equal to the initial gross indebtedness. The amount of insurance is level throughout the term of the loan. This plan is used for single payment loans.

Single Premium Decreasing Net Payoff Coverage – decreasing term insurance is provided with an amount of insurance which begins at the initial net indebtedness. During the loan term, the insurance is equal to the scheduled outstanding net indebtedness of the loan, possibly with some additional provision for delinquent payments or changes of loan conditions on variable interest rate loans. Net payoff coverage is used for some closed-end installment loans and most long-term loans.

 

Monthly Outstanding Balance Coverage – is when insurance is provided with pays off the outstanding balance of the loan on the date of death. Coverage is purchased monthly with a premium based on the loan balance on the monthly billing date. While the coverage may be used for closed-end installment loans, its use has generally been limited to open-end borrowing. This coverage is used for non-contributory plans, and for credit card and revolving charge account business.

 

Truncated Life Coverage – coverage is identical to single premium decreasing net payoff coverage, except that the term of the insurance coverage is shorter than the term of the loan. Insurance is provided for the full net indebtedness during the term of the insurance coverage. A renewal option may be offered when the insurance expires. Truncated life is offered on long-term loans.

 

Critical Period Life Coverage – is where insurance is provided for the full term of the loan, but the amount of insurance is not tied to the loan balance. The death benefit is equal to a stated number of monthly payments, or the remaining monthly payments, whichever is less. The coverage is offered in situations where the objective is to offer some insurance protection with a minimum premium dollar outlay.

 

Credit Disability Plans.....

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