Credit Life Insurance Prices

Abstract

The purpose of this paper is to report on the results of an attempt to measure the price of credit life insurance in comparison with the prices of other forms of life insurance coverage, together with the necessary qualifications. The conclusions to be drawn from the study depend on whether the person making the comparison feels that the appropriate basis is individual cash-value life insurance, or individual term insurance, or association group life insurance, or regular group life insurance. The conclusions also depend on the nature of the age and loan amount distributions of the borrowers, and on whether the comparison is made with low, medium, or high credit life rates. This paper provides some data that can be used to make comparisons on several bases, and describes a methodology that can be employed to generate data on many other bases. Credit life insurance in recent years has been the fastest growing form of life insurance coverage. From 1958 to 1968, for example, credit life insurance in force increased by 253 percent-from $21.5 billion to $75.9 billion. During the same period, ordinary life insurance in force increased by 119 percent, group life insurance in force increased by 203 percent, and industrial life insurance in force decreased by 2 percent.' At the same time, credit life insurance has been subjected to various attacks as overpriced, and has been defended as reasonably priced.3 Yet, no systematic, Joseph M. Belth, Ph.D., is Professor of Insurance in the Graduate School of Business at Indiana University. He is author of The Retail Price Structure in American Life Insurance ( 1966 ) and Life Insurance: A Consumer's Handbook (1973). Dr. Belth is President-Elect of A.R.I.A. This paper, which was completed early in 1970, was prepared as one portion of the Consumer Credit Life and Disability Insurance Study conducted by the College of Business Administration at Ohio University. 1 Life Insurance Fact Book 1969 (annual; New York: Institute of Life Insurance), p. 23. 2 See, e.g., Statement of James H. Hunt, in Consumer Credit Industry (Hearings on S. Res. broad-based attempt has been made to measure the price of credit life insurance in comparison with the prices of other forms of life insurance coverage. The purpose of this paper is to report on the results of such an attempt, together with the necessary qualifications. No form of life insurance is a perfect substitute for or directly comparable to credit life insurance. Some of the usual characteristics of the latter are coverage automatically equal to the loan amount outstanding, issuance without evidence of insurability, identical premium rates (in the case of any one lender) regardless of the age of the borrower or the amount of his loan, and inclusion of the premium with the loan payments. Since at least one of these characteristics is absent from any form of life insurance with which credit life insurance might be com26 before the Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, U.S. Senate, 90th Cong., 1st sess.) (Washington, D.C.: U.S. Government Printing Office, 1967), pp. 57-68. 3 See, e.g., An Evaluation of Credit Life Insurance, in ibid., pp 2651-2792.