Reinsurance tutorials #22
What is credit Life?
Credit life insurance is a type of life insurance policy designed to pay off a borrower's outstanding debts if the borrower dies or is disabled. The face value of a credit life insurance policy decreases proportionately with the outstanding loan amount as the loan is reimbursed over time, until both reach zero value.
Typical Credit Life cover includes death and disability (partial or permanent) as well as riders such as critical illness. Credit Life is mainly tailored to cover health hazards and, time to time, economic upsets such as unemployment.
In the event of death or permanent disability, the total outstanding loan amount at the date of the event is paid.
For a short term disability or in case of Involuntary Loss of Employment, the amount payable will be restricted to a number of instalments.
In case of Critical Illness claim, the amount payable would be flat or a percentage of the Outstanding Loan balance at the event date and subject to a sub limit too.
Credit life insurance is typically sold by banks. Banks offer a range of Credit Life products, of which the most popular are: mortgage loan protection, personal loan, auto loan, revolving or credit cards. The pitch is to protect one’s heirs if one dies, since the policy will pay off the loan.
Credit Life cover could be sold to an Individual or a Group.
Group Credit theoretically provides lower margins than for Individual Credit compensated by the volume of business (compulsory insurance for all borrowers).
When banks lend money, part of the accepted risk is that the borrower could die before the loan is repaid. As such, credit life insurance genuinely protects the lender, not the designated beneficiary. In fact, the payout on a credit life insurance policy goes straight to the lender, not to the beneficiary.
The reinsurance program can cover the full duration of the Credit or can be on an annual basis.
On a Decreasing Term Individual or Open Group Credit Life, where the Insurance is compulsory for all eligible borrowers, a flat monthly reinsurance rate is applicable to the overall population.
The calculation of the monthly premium due will be as follows:
= Total outstanding loan balance as per
Statement x Monthly Premium Rate
In case of a single applicable premium, an insurance premium may be added to the initial loan amount but there would be an extra-cost if the loan interest is higher than the pricing rate. The premium could be refunded (or not) in case of early reimbursement of the loan.
As with Group Life, where the insurance program is compulsory, there is a reduced medical underwriting, except for large insured sums that include financial underwriting. For Single premium or Individual Credit, standard Medical & Financial Underwriting is applicable.
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