Ed Yeung, Vice President, Insurance Products
Having worked in the creditor insurance world for over a decade, people often ask me, “Isn’t that creditor stuff a rip off?” While at first glance, it might seem that way, there are indeed advantages to this type of offering, which make it a viable segment in the insurance market. The most common complaints I hear are:
1. It’s too expensive;
2. Level premium should mean level benefit, not decreasing benefit;
3. It’s not flexible, since the benefit only goes to the creditor;
4. The post claim underwriting means that I am not guaranteed a benefit payout if I make a claim.
Let’s take a look at each of these complaints, and see if perhaps they can be explained away. But before examining in more detail, let’s first define the nature of creditor insurance, and give a brief of history to its evolution.
Creditor Insurance – A Brief Outline
Traditionally, creditor insurance came about as a means for lenders, in particular banks, to add extra security to their loans, whether they be mortgage loans, vehicle loans or just general consumer loans.
The banks were looking for ways to guard against sudden default on a loan, due to events such as death or disability of the borrower. They also wanted a simplified issue process, that didn’t involve an insurance agent or require special licensing. Enter, Group Creditor Life and Health Insurance.
There were three key features that made creditor insurance attractive to lenders:
1. Creditor Insurance is group insurance, where the lender is the group policyholder and group sponsor. Hence lenders do not require a licensed agent to offer the insurance. They are deemed to be enrolling members in a group plan.
2. The insurance proceeds can only be paid to the lender to reduce or extinguish the loan. This allows lenders to have direct security on their loans. There is no need to get in line as a creditor to the estate, and no need to wait for the foreclosure or sale of the collateral property.
3. Creditor Insurance is usually simplified issue, or even guaranteed issue, which lends itself to a very easy enrolment process.
Myth #1 – Too Expensive
A common myth is that creditor insurance is “too” expensive. But what is “too” expensive? Is milk too expensive at the corner store, versus the supermarket? Yes, but do some people still buy it there? Yes, why? Because it’s convenient.
How about a more sizable purchase like a home? Some people might argue that renting is “too” expensive relative to buying. Then why don’t we all buy? Well, for some people, it’s the discomfort of a huge mortgage. For others, it’s the lack of good credit. For others, it’s just more convenient to rent (e.g. not responsible for maintenance).
Now, let’s look at the purchase of insurance. Indeed, creditor insurance can be more expensive than preferred term, or even standard term, under most circumstances. But what does it take to get that better rate? A lot of shopping around? Back and forth sessions with the insurance agent, the nurse and the doctors? An extended time period of uncertainty?
All of the above weigh on the consumer’s decision, and many consumers attach a high “cost” to those activities. There is a cost for convenience, and creditor insurance is often the most convenient product for someone just looking to cover only a specific debt.
Also, for coverage on small loans, such as car loans, one typically can’t get access to insurance on such a small amount, especially with regard to disability insurance.
Myth #2 – Level Premium should mean Level Benefit
I often hear people say, “My creditor insurance benefit is decreasing, but my premium stays the same. That’s just wrong!” What they do not understand is that the premium they are being charged, already takes into account that the benefit is decreasing. If the benefit had been level, then the premiums would have been almost double.
A very big misconception is that the pattern of premiums should track the pattern of benefit. But mismatching of premiums and benefits is not uncommon at all. Take a look at a level benefit universal life policy with YRT premiums. The benefit stays level but the premium goes up year after year!
Myth #3 – Creditor as the Beneficiary makes it Inflexible
The fact that insurance benefits only accrue to the creditor, makes people think that creditor insurance is inferior relative to term insurance. However, this feature actually creates a flexibility that is not otherwise available.
Most disability income insurance plans have built-in offsets. If you are disabled, and claim on your individual or group disability policy, one of the first things the insurer will do, is to check for offsetting benefits (e.g. social security, wsib, spousal plans, etc.). Any benefits you receive will be deducted from the benefit you would have otherwise received. Guess what insurance benefits are not included in the offset calculation? You guessed it – Creditor Insurance.
Thus, creditor insurance offers a flexible way to isolate certain debt obligations, insure them fully, and still have the full benefits of your other disability insurance without corresponding reductions.
Also, the fact that the creditor is the named beneficiary means that the lender does not have to wait in line to make a claim on the estate. Creditor insurance provides a secured creditor situation for the lender. This can also allow the lender to offer better borrowing rates to the borrower, since the insurance can lower the default rate.
Myth #4 – Post Claim Underwriting is a Scam
The dreaded pre-existing condition clause has made its way through various news “exposés” on more than one occasion. These one-sided narrations tell the tale of how unsuspecting customers bought the creditor insurance thinking they were covered for conditions from which they were already suffering, and how the nasty insurance companies maliciously denied their claims.
They also claim that the car dealer or loan officer who sold them the insurance, didn’t explain everything to them. While this may have actually happened on occasion, these are isolated incidents. But more importantly, are people not responsible for their own actions? Does caveat emptor apply to everything else except insurance?
Just about every creditor insurance application and certificate clearly states that there are exclusions, and that the buyer should carefully read the list of exclusions before purchasing. In fact, the buyer signs right below the disclaimer that states the buyer did indeed read everything before signing.
In the end, many of these “misled” claimants turn out to be people who thought they could walk in sick, buy the insurance, and claim tomorrow.
Post claim underwriting is not meant to scam the insured, but to provide a simple and streamlined way to apply for the insurance. Also, most coverages only exclude the pre-existing condition for one year, so if one is indeed ill but survives for a year, then coverage is still available for that condition.
Conclusion
Creditor insurance gets a bad rap in my opinion. There are many features which appear to be disadvantageous, but they are all there for a reason, as explained above. Creditor insurance fills the void, where the average consumer can get quick and easy access to life and health insurance coverage, without the hassles of traditional agent-sold insurance. Very often, creditor insurance is the only means by which a consumer can get a small amount of insurance for a short period of time, and this may be all that they require. It also provides a means to potentially secure better borrowing rates from their lender. So the next time someone complains to you about creditor insurance, perhaps you can help enlighten them with some of the concepts described above.