Credit life insurance: individual versus group

What credit life insurance does

Credit life insurance is life insurance on a borrower that pays off, or pays down, a specific debt if the borrower dies before the debt is repaid. The creditor (the bank, credit union, finance company, auto dealer or retailer that extended the credit) is the beneficiary, up to the unpaid balance. The point is that the debt is settled at death instead of falling on the borrower's estate, family or co-signer.

Keep the roles straight, because exam questions are built on confusing them:

• Insured: the debtor (borrower).
• Beneficiary: the creditor (lender), to the extent of the debt.
• Who benefits indirectly: the borrower's family and estate, which inherit assets free of that loan.

Features common to both forms

• It is term insurance. Credit life builds no meaningful cash value and ends when the debt ends.
• Decreasing term for installment loans. On a car loan or mortgage-style installment debt, the face amount declines as the balance is paid down, so the coverage tracks what is actually owed.
• Level term for single-payment loans. When the whole balance stays outstanding until one lump-sum due date, the face amount stays level until that date.
• Coverage is tied to the debt. The amount of insurance generally cannot exceed the amount of the debt. Credit life exists to retire a loan, not to create an estate. If a benefit is ever larger than the balance owed, the excess goes to a secondary beneficiary or the insured's estate, never to the lender.
• The term matches the loan. Coverage ends when the loan is paid off or when its scheduled term runs out.
• The borrower keeps a choice. A lender may require that a loan be protected by life insurance, but standard consumer-protection rules let the borrower satisfy that requirement with existing coverage or a policy from an insurer of the borrower's choosing. The lender cannot force the purchase through one particular company.

Individual credit life

Under individual credit life, the insurer issues a separate policy to the borrower. The borrower is both the policyowner and the insured, and the creditor is named as beneficiary, or takes an assignment, for the amount of the debt. The borrower applies individually, the insurer may underwrite that one life, and the borrower receives a policy. Because it is written and administered one life at a time, individual credit life usually costs more per dollar of coverage, and it is the less common form.

Group credit life

Under group credit life, the insurer issues one master policy to the creditor, who is the policyholder. Every eligible borrower of that lender becomes an insured life and receives a certificate as evidence of coverage, not a policy. The creditor is the beneficiary.

• Premium. The creditor may pay it, or charge it to borrowers, typically built into their loan payments.
• Underwriting. Eligibility comes from being a debtor of that creditor, and the amount comes from the loan balance, not from anyone's choice. That precludes individual selection and controls adverse selection, so little or no evidence of insurability is usually required.
• Cost. One contract covering many borrowers spreads acquisition and administration costs, so group coverage is cheaper. It is by far the more common form.
• Ending coverage. A borrower's coverage ends when the loan is paid off or the person stops being a debtor. Group credit life generally carries no conversion privilege, because there is no longer a debt to protect.

Telling them apart

The fastest test is who owns the contract. If the borrower owns a policy, it is individual credit life. If the lender holds a master policy and the borrower holds a certificate, it is group credit life. In both forms the borrower is the insured, the lender is the beneficiary, and the coverage is term insurance sized to the debt.