Credit insurance policies sold with consumer installment loans are overpriced, in part because of outsized commissions that insurers often pay lenders, according to a new study.
Reinvestment Partners, a consumer advocacy group based in Durham, found that from 2004 to 2013 just 44..4 cents in benefits were paid out for every dollar in premiums spent nationwide on credit insurance policies that pay off in the event of a borrower’s death. That compares to 84.1 cents in benefit payments from individual health policies for every premium dollar.
The payoff from credit insurance policies that pay off some or all of a loan if a borrower becomes ill or injured and can’t work is even lower – 42.4 cents for every dollar in premiums paid.
“They’re a bad value,” said Adam Rust, director of research for Reinvestment Partners and the author of the study.
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The report issued this week found that insurers often pay the non-bank lenders that offer consumer installment loans high commissions in exchange for being the exclusive provider of credit insurance.
“In some instances, insurers expense more for commissions than they do for claims payouts,” the report found.
Ben Winstead, president of the Resident Lenders of North Carolina, which represents independently owned consumer finance companies in the state, said he hadn’t seen the report and therefore couldn’t comment on it.
But, he stressed, credit insurance is an optional product.
“It’s not required for the loan,” he said.
Tom Keepers, executive director of the Consumer Credit Industry Association, said that given that consumer credit insurance is a “small-dollar product,” it’s inevitable that “the expense to deliver the product is a higher percentage (of the premium dollar) because the numbers are smaller.”
“To me, it’s a non-starter to compare credit life insurance to a health insurance policy,” Keepers said. “They’re absolutely, fundamentally different.”
“People need these products,” he continued. “They absolutely provide real value. ... They help people make their payments.”
Study author Rust said that credit insurance policies may be “under the radar” but they’re purchased by many borrowers.
The study, citing data from the state banking commissioner, reports that in 2015 North Carolina, consumers paid $58.5 million in premiums on 623,545 credit insurance policies for loans covered under the state Consumer Finance Act. Those numbers don’t include credit insurance sold for auto loans, some home equity loans and loans for buying retail goods.
The lender is “the ultimate beneficiary” of credit insurance, since it insures that the borrower will be able to pay off all, or a portion of, the loan amount.
Typically, credit insurance premiums are rolled into the loan, increasing the overall cost of borrowing.
Rust said that borrowers should consider credit insurance on a case-by-base basis.
“I hesitate to absolutely say (people) shouldn’t use them, but I would say they should be very cautious,” he said.
One problem with consumer credit loans is that there’s little opportunity for comparison shopping.
“Usually, there is only one product to choose from” when obtaining a consumer installment loan, the report states.