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Credit insurance: beauty or beast?

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Abstract

FRBSF WEEKLY LETTER October 10, 1986 Credit Insurance: Beauty or Beast? Credit insurance on consumer loans is big busi- ness in the United States. In 1985, nearly 70 mil- lion credit life insurance policies with coverage of almost $200 billion were insuring individual borrowers against default on car loans, personal loans, and other extensions of consumer credit. Some form of credit insurance covered approx- imately 70 percent of all closed-end (non- revolving) consumer loans made in 1985. Given such figures, it is tempting to conclude that credit insurance is well-understood and highly desired by the borrowing public - a view frequently expressed by credit insurance underwriters and the lenders who sell such insurance. Critics of the credit insurance indus- try, however, have long argued that much of the "popularity" of credit insurance is due to other factors, including borrower ignorance of alterna- tives to credit insurance and coercive practices by lenders. Such sharply divergent views have created intense debate over credit insurance. This Letter examines some long-standing consumer issues surrounding the credit insurance product. The analysis concludes that credit insurance often can fulfill the legitimate needs of borrowers at a reasonable cost, although premium rates in some states may be excessive. Also, borrowers should carefully assess their need for this prod- uct, be aware of potentially abusive sales prac- tices, and recognize their legal rights to refuse the purchase of credit insurance or to seek it from an alternate source. Purpose of credit insurance Credit insurance is sold to borrowers in connec- tion with the extension of consumer credit by a lender, usually a financial institution or retailer. It is designed to ensure the repayment of a bor- rower's debt in the event of death, disability, or loss of property. Lenders typically purchase credit insurance from underwriters on a group basis. The lender holds the policy and issues a certificate of insurance to the borrowe

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