The terms are references to the amount of credit life insurance on the loan. Gross is more than net. Gross equals the amount of the loan principal plus the loan interest. Net equals only the loan principal. For example, a $5,000 loan at 10% interest repayable over 60 months would have a total of payments of $6,375 (loan interest is $1,375). Gross coverage is an initial $6,375 of decreasing term life insurance. Net coverage is an initial $5,000 of decreasing term life insurance.

The value of gross coverage is a benefit margin sufficient to payoff the loan balance even if the loan payments are a few months delinquent, a common occurrence since death is often preceded by lingering illness and medical expenses making timely loan repayment difficult. Of course if the loan repayments on schedule, then the excess benefit is paid to the borrowers estate. This excess benefit would equal the amount of unearned loan interest.

The option to provide gross or net coverage only exists for credit life, and only in connection with a prepaid single premium on a closed-end loan. Credit disability and credit unemployment coverages provide a benefit equal to the monthly payment for a specified number of months. Since the monthly loan payment includes principal and interest, the credit insurance benefit is the gross amount.

What is loss ratio?

Technically, loss ratio means incurred claims divided by earned premium. More simply, loss ratio is the percentage of total claim payments paid out of total premiums collected for an insurance product or insurance line of business. For example, if an insurance company collected $1,000,000 of premium for credit life insurance and paid $500,000 in credit life insurance claims, then the loss ratio would be 50%.

It's important to note that references to loss ratio pertain to the aggregate experience for a product line during a defined period of time. Also, loss ratios will fluctuate from one period of measurement to another because the actual number of claims and amount of claim payments cannot be precisely predicted or controlled. Regardless of product line loss ratio experience, the insured borrower will get 100% of the promised insurance policy benefit for which premium has been paid.

It's equally important to cautiously note the limitations of loss ratio as a measurement tool. Loss ratio alone is not a measure of insurance product profitability. Loss ratio alone is not a measure of insurance product consumer value

What is component rating?

Component rating attempts to describe in layman terms the technical process of calculating the premium rate to be charged for an insurance product. It places a monetary value on all costs associated with the development, distribution, and servicing of an insurance product, including a reasonable allowance for expected profit, and adds up those costs and allowances to get a fair premium rate.

Fair insurance premium rates should be neither excessive to the consumer nor inadequate to the insurance company. Insurance companies use specially trained and certified actuaries to calculate product premium rates. In accordance with professionally recognized standards of practice, a premium rate must include an allowance for claims, general and administrative expenses, distribution costs, investment income, the manner in which premiums are charged and other acquisition costs, reserves, taxes, regulatory license fees and fund assessments, reasonable insurer profit, and other relevant actuarial data.

To illustrate the concept, consider the consumer price of a gallon of milk at the grocery store. The price will include the costs of paying the diary farmer, collecting and processing the milk, processing plant equipment and maintenance, salaries and benefits to processing employees, federal and state taxes, packaging in bottles or cartons, delivery to the grocery store, advertising, and profit. The actual cost of the milk could be a small part of the total price to have it conveniently available to consumers at the grocery store.

What is single premium?

Single premium is a reference to how the premium charge for the insurance coverage is calculated and paid. The full amount of the premium is calculated and paid in a single sum up front instead of monthly or annually or some other periodic premium payment. It is only available in connection with closed-end loans because the loan duration must be specific for the premium amount to be calculated. The single premium rate is specified as cents per hundred dollars of coverage per year, e.g., $0.50/$100/Year.

Single premium is often referred to as financed single premium. While the borrower can pay the single premium in cash, s/he rarely does. Instead the amount of the premium is added to the financed principal amount of the loan. For example, if the borrower wants single premium credit life insurance on a one-year $1000 loan, the actual loan subject to finance charges would be $1005 ($1000 plus $5 single premium using the above rate).

Occasionally a borrower will encounter a "truncated" single premium. This means that the credit insurance coverage being offered will not cover the full term of the loan. Rather, it provides full coverage for the first five years of a longer-term loan (10, 15, or 20 years) but is financed over the entire term of the loan. This keeps the cost of the coverage low and affordable to the borrower. Also, experience has shown that most long term loans are refinanced within five years.

How does credit life insurance compare to term life insurance?

Credit life insurance is term life insurance. Term life insurance is just insurance. There is no savings or investment provision in the policy as there would be with Whole Life, Universal Life, or Variable Life. Term insurance is either level (a fixed amount of coverage for a specified period of time) or decreasing (the initial amount of coverage decreases over a specified period of time). Credit life insurance can be level or decreasing. The distinguishing definitional factor is that credit life is sold in connection with a loan or other credit transaction.

However, there is a significant substantive difference to be noted. Most credit life insurance is essentially non-underwritten. What this means is that every eligible borrower electing credit life insurance will pay the same premium rate. Borrowers are eligible if they are between the ages of

18 and 65 (70 in some states) and have not been diagnosed as having a terminal disease. Ordinary term life insurance is underwritten, meaning the premium rate will be dependant upon age, sex, smoker/non-smoker, health history, family health history, weight, personal habits and hobbies, and usually a medical examination. Accordingly, sometimes the premium rate for ordinary term life will be more than for credit life and sometimes it will be less.

Another noteworthy distinction is the amount of coverage that must be purchased. Ordinary term life insurance is subject to minimum purchase amounts of at least $50,000 but often much more. Credit life is never more than the initial amount of the loan or credit transaction, most often an amount less than $50,000. This too can affect the "out-of-pocket" cost to consumers. While the premium rate for credit life insurance might be higher, the total premium charge could be lower because a lower amount of coverage is purchased. When the borrowers intent is to pay off the debt in the event of death, credit life insurance is just the right amount to accomplish the purpose.

What is reverse competition?

Reverse competition is not defined in conventional economic textbooks, so the theory is suspect. The theory is that sellers compete for the business of the distributor thereby increasing the cost of the product to the consumer. As applied to the credit insurance environment, it argues that insurance companies compete for the business of the lender/distributor by paying higher commissions than a competitor resulting in a higher premium rate to the ultimate consumer. There is no evidence that insurance companies have actually increased premium rates to fend off competitors.

However, if reverse competition as defined ever did exist, it no longer does. Credit insurance companies must file policy forms and premium rates with the State Insurance Departments. The Insurance Commissioner will disapprove the use of the policy forms if the premium rates are not reasonable in relation to the policy benefits. Accordingly, the insurance company cannot increase the credit insurance premium rate charged to the consumer.

Do I have to buy credit insurance?
How do I know if credit insurance is right for me?

There are a few questions to ask yourself to determine if credit insurance is right for you.

Will your spouse or dependents have to pay the debt? Most purchaser of credit life insurance say they purchase the coverage so that the debt will not be a financial burden to others if they should die.

Is the loan amount small enough that the monthly payments could be handled easily without insurance? Many purchasers would find it difficult to make the monthly loan payments if they became disabled or unemployed.

Do you currently have adequate savings and/or other insurance to cover your needs? Most purchasers of credit insurance have little, if any savings set aside for emergencies and little or no other insurance to provide funds in the event of death, disability, or unemployment. As a guide, consider that financial experts recommend savings for emergencies equal to six months of income and life insurance equal to as much as seven times annual earnings.