Mortgage Life Insurance and Bank, Creditors and Lenders
What Should You Know About Creditor or Bank Offered Mortgage Insurance
The following is a state approved presentation. If you have or are considering bank or 
creditor life insurance, you must read this first! Major points are highlighted in red. Also see more here.
Creditor and Group Life insurance
Creditor group life insurance is a specialized form of group term insurance issued to a creditor (policyholder) under which the lives of the borrowers of money or purchasers of goods are insured in connection with specific loans or credit transactions, subject to statutory and underwriting principles.
Creditor Group Life Insurance Versus Conventional Group Term Life Insurance
There are several basic differences between the nature of creditor group life insurance and conventional group term life insurance. First, in conventional group term life insurance situations, there usually is an employer-employee relationship, but creditor group life insurance is concerned only with a creditor-debtor relationship. For example, the group may borrow from the creditor, with the master group policy issued to the creditor.
However, under a creditor group life insurance contract each debtor usually is covered for an amount of life insurance equal to the amount of debt to the creditor. Thus, decreasing term insurance is used to secure debt, and, as the debtor makes installment repayments and reduces the amount of debt, the amount of insurance on his life reduces correspondingly. If the unpaid balance exceeds the maximum amount of life insurance provided under the group contract, the debtor may be insured for the maximum permitted under the policy until his debt is reduced to this amount, or the proportion that the original amount of his debt bears to the maximum amount of insurance, and, hence, the amount of coverage is continually decreased.
Creditor group life insurance proceeds must be used for the specific purpose of reducing debt. When an insured debtor dies, the outstanding amount of creditor life insurance is automatically payable to the creditor. Unlike other group insurance situations, the creditor is in the unusual position of being both policyholder and beneficiary.
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Eligible Creditors, Loans and Purchases
In its early development, this form of insurance was underwritten on unsecured personal loans made by banks. Today's eligible creditors, subject to statutory and underwriting considerations, may include commercial banks, savings and loan associations, trust companies, sales finance companies, dealers, retail vendors, small-loan companies, employee credit unions, colleges and universities, credit card companies, mutual funds, production credit associations, memorial parks and federal land banks. The eligible creditor may wish to insure types of indebtedness involving unsecured personal loans, certain types of secured personal loans, motor vehicles, farm equipment, appliances, mobile homes, home modernization, crops, seed and livestock, educational loan plans, revolving credit (including bank line of credit), furniture, burial plots, credit card charges, real estate mortgages and the purchase of securities, or a combination of types.
Creditor Modifications of Conventional Term Plan
Many modifications have been introduced in adapting the conventional group term plan to fit the creditor-debtor relationship.
Contract Provisions
The uniqueness of a creditor group life insurance contract is immediately apparent upon reading the contract's insuring clause, as the creditor is both the policyholder and the beneficiary. This clause also stipulates that the creditor must apply the death benefit toward the discharge of the debt. Thus, it is obvious that designations of a beneficiary, settlement options and facility of payment are not needed or appropriate as in conventional group term life insurance provisions.
Another unusual aspect is the fluctuation in the amount of insurance on the life of each insured debtor. These fluctuations generally occur on a monthly basis when the debtor reduces the amount of his debt by making installment repayments. A proper insurable interest is maintained at all times since the amount of insurance at any time is usually the amount necessary to pay the debt, subject to the maximum amount stated in the group policy. This aggregate amount of insurance which is in force on the life of the debtor may not exceed the policy maximum—regardless of the total amount of his debts.
Only one person may be insured for each debt—since co-signers are often involved in credit, or the group may have purchased goods under conditional sales contracts from a vendor with the group policy issued to the vendor.
Under group term life insurance contracts involving an employer-employee relationship, each classification is insured for a level face amount of transactions and the creditor is given the right to select which debtor shall be insured. For example, if more than one person signs the instrument evidencing the debt, the person whose signature appears as debtor nearest the top of the instrument, or if more than one signature is on the same line, the person whose signature appears to the left, shall be the person covered hereunder with respect to such debt.
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The misstatement of age clause has little or no application to creditor group life insurance, since practically all insurers forego the calculation of rates based on age data. Likewise, the incontestable clause has little applicability because the facts provided by the creditor are readily verifiable by the insurer, and seldom does the insurer require any evidence of insurability from the individual debtors. As a result of the length of the repayment period and the amount at risk, a suicide clause normally is found only in creditor group mortgage contracts.
The master contract may be terminated in any one of four ways—at the request of the creditor, for nonpayment of premium, for failure to maintain a minimum volume of insurance or for failure to obtain a minimum number of new debtors each policy year. An individual debtor's insurance is terminated if:
The master policy is terminated.
The debt is discharged.
The debt is transferred to another creditor.
The debtor fails to make installment payments when due.
Most insurers issue a certificate of insurance to the individual debtors, although usually this is done only in those states where it is required by law. This document is called a statement of insurance, and it describes the nature of the insurance protection provided, the conditions under which the coverage terminates and the refund formula which must be used in case the debt is repaid prior to its scheduled maturity date.
Premium Rates
Various states have issued regulations to help insurers and state insurance authorities establish what may be considered a reasonable rate, and some states require that filed rates may not exceed the established principle. These regulations have been issued because of the "reverse competition" that is often involved in creditor group life insurance. Lending institutions often receive a commission and experience rating refund in connection with this coverage. Since the cost of the protection often is borne entirely by the borrower, lenders are interested in the highest available insurance rates, rather than the lowest rates.
The most common premium payment method is to base the premium on the amount of insurance outstanding on each monthly premium due date. The popularity of the "outstanding balance method" of premium payment is almost equaled by the use of the "single premium method." Under the single premium method, the full premium, which is based on the initial amount of debt and its anticipated decrease over the repayment period, is immediately turned over to the insurer by the creditor. Another method is the "equal payment method," which provides for a level amount of monthly premium over the duration of the loan.
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Underwriting
Since the creditor underwrites the debtors, adverse selection is always a matter of serious concern to the insurer. Fierce competition among lenders can lead to the acceptance of installment accounts based more on past credit experience than on age, health and conditions of employment.
Most creditor group life insurance plans are debtor-pay-all, and a proper spread of risk is endangered when the consumer credit department of the lending institution does not aggressively sell the insurance protection to all eligible debtors or require the purchase of insurance as a condition for the debtor obtaining the loan. This matter of low participation has become an especially acute problem under creditor group mortgage plans.
An additional opportunity for adverse selection is present in many creditor insurance plans due to the fact that the borrower may elect to take a loan of any size up to the maximum permitted by the creditor. An insurer is definitely encouraging lax creditor underwriting practices and adverse selection when loans secured by marketable collateral are insured.
Administration
The administration of a creditor group life insurance plan is normally simple and economical, since the record keeping is performed by the creditor. For example, under the outstanding balance method of premium payment, the creditor usually completes a brief premium statement by multiplying his premium rate by the average amount of insurance outstanding during the period. A statement is also made as to the number of new insured loans for the month, and this information is used at renewal time to determine the number of new entrants added during the policy year. On large cases, the creditor may be given the right to pay the claims directly by means of an insurance company draft book.
Due to the usual growth of a creditor plan during the early policy years, it has become quite common to pay additional first-year commissions in the second policy year. This additional first-year commission is based on the excess of the second year premiums over those for the first year. Unlike a conventional group term life insurance plan, the installation of a creditor group life insurance plan is relatively simple. The insurer's representatives contact only the creditor, and even in a debtor-pay-all case the individual debtors are never approached by these representatives.
Regulation
Creditor group term life insurance, unlike conventional group term life insurance, is influenced by indirect regulatory sources as well as by direct statutory regulations. Indirect regulatory sources would involve, at the federal level, the Comptroller of the Currency and the Federal Trade Commission. At the state level, it is subject to regulation through state banking departments, state interest and usury laws, and conditional sales acts.
A model bill which placed group and individual creditor life insurance in the same category for regulatory purposes was drafted by the National Association of Insurance Commissioners in 1958 and has been revised frequently since then. Most states have adopted this model bill, sometimes with variations or a law with similar objectives. The bill establishes a control on maximum rates and imposes requirements that charges for insurance to the debtor may not exceed the premium, that complete disclosure of the charge must be made to the debtor, and that a descriptive policy, certificate or statement of insurance must be issued to the debtor in every case.
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