At this point, you get that some sort of Payment Protection is essential for your institution and borrowers. You’ve done the homework on understanding the options available. As you know, they fall into two primary categories: Credit Insurance or Debt Cancellation.
The latter is a newer product that may offer additional features you find beneficial. Which is cool, but is the old standard Credit Insurance better suited to your borrowers? This is a decision we are here to help you make. Read on for the guidance and information you crave.
This article will compare Credit Insurance and Debt Cancellation to help you determine the best fit for your financial institution. Before continuing, you may wish to read:
- Payment Protection (Introduction)
- Credit Insurance (Defined & Benefits)
- Debt Cancellation (Defined & Benefits)
Comparing Credit Insurance & Debt Cancellation
To make this comparison easier, it helps to know your state (and states these products will be offered) regulations. They may inform certain aspects and help guide your decision-making process.
Another “unique-to-you” feature is the product integration with your institution’s systems. If it ties in with your existing LOS/core, then your staff can easily offer and add it to loans. The simpler this process is, the better chance it will get staff (and thus borrower) uptake.
Since those are specific to your institution, we will talk more upper-level on them (and explain the typical regulatory scenarios). Additionally, this article will help you determine the following:
- Cost and income comparison between programs
- Borrower need for specific protections
With this information, we hope you will be better empowered to make the best decision for all parties.
Why Choose Credit Insurance
Institutions typically go with credit insurance because:
- In some states, it’s easier to get an insurance license, making credit insurance an approachable choice.
- Perceived as the more established and traditional program.
Why Choose Debt Cancellation
Institutions choose debt cancellation for two main reasons:
- Increased flexibility of contracts they can offer to borrowers (more protection and opportunities for non-interest income).
- No need for an insurance license to sell.
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Keep Me Informed!
Ready for our full disclosure on these services? We offer both. Working with our providers may or may not be a fit. It doesn’t matter to us which you choose, so long as we can help you best serve your borrowers, protect the institution, and create channels for non-interest income.
Of course, it’s about protecting the largest number from the unexpected at an affordable price.
Selling Payment Protection
Payment Protection may be sold directly by your institution (the lender) through an arrangement with a vendor company. As mentioned above, your requirements differ depending on the state and service chosen.
Do You Need An Insurance License?
To sell credit insurance, your institution or individual staff members may be required to be licensed. These requirements vary by state. No license is required to sell debt cancellation contracts. On its own, this can make them a more attractive option.
Paying for Payment Protection
Coverage premiums are normally added to borrowers’ monthly payments. It can be canceled at any time. That tends to happen when the borrower feels their debt load reaches a point where other assets will cover it.
MOB or Single Premium
Typically, credit insurance is sold as MOB, or Monthly Outstanding Balance. This is based upon the current outstanding debt and paid monthly. Payments are amortized. Single premium adds the entire cost to the loan. It’s the less popular option.
Debt cancellation can be sold in either fashion, but is designed for MOB as well.
Refund policies vary for two reasons:
- State regulations
- Style of payment
- MOB (Monthly Outstanding Balance): Premiums are considered “earned,” and there is no refund if coverage is canceled.
- Single Premium: If insurance is canceled or paid early, borrower usually can receive a pro-rata refund.
In terms of offering, selling, and paying for, both credit insurance and debt cancelation are quite similar. Let’s look at their differences.
Credit Insurance: Considered an insurance product, and is regulated by each state’s insurance department.
Debt Cancellation & Suspension Agreements (DCC & DSA): Considered banking products. Regulated by the OCC for national banks and federal credit unions.
In most states, state-chartered institutions have “parity” with OCC rulings for federally-chartered institutions. However, before starting up a DCC/DSA program, we recommend checking with your state’s banking and insurance regulator, just to be sure.
Credit Insurance: You need an insurance license to offer and sell credit insurance. Depending on your state, this is either simple or complex. Why? Some states only require your institution secure a license, while others require any staff who will be offering to also hold a license.
In addition, there may be requirements for formalized courses, testing, and continued education.
DCA/DSA: Typically, you don’t need any licensing to sell debt cancellation contracts and suspension agreements. Note: If your institution is state-chartered, there may be specific state requirements.
- Credit Life
- Joint Credit Life
- Credit Accident & Sickness (Disability)
- Involuntary Unemployment Insurance (IUI) – Less common and typically for credit card or other open-end balances
Waivers may be issued for:
- Medical sickness or injury
- Involuntary unemployment
- Military service
Rates are regulated by the state insurance department, which maintain Prima-facie rates. These are standardized rates that all insurers must charge. Insurers also must meet certain loss-ratios. Should those ratios rise, insurers may file for a rate increase.
Rates are set competitively in accordance with safe and sound banking principles. Neither the OCC nor any other agency controls non-interest charges and fees.
Your mission with payment protection products is three-fold:
- Help your borrowers
- Protect your collateral
- Increase non-interest income
This section looks at any regulatory barriers to profit potential. The following part will directly address non-interest income and additional ways to monetize beyond the mark-up.
Insurance regulators set the cap on rates charged in your state. The institution has no direct control over these values. Therefore, “mark-up” is simply your institution’s commission, which is built-in to the rates.
Mark-ups are affected by the two ways financial institutions can offer this product:
- Self-insured: Your institution can set just about any rate with the mark-up you choose
- Insured: Your institution is still free to set rates and mark-up, however, there is a cost for the insurance. We’ll address that in the next section.
Non-Interest Income (Plus Profit Share)
As the insurance regulators determine the rates (based upon loss ratio experience), they also set the maximum amounts that can be paid to your institution. This non-interest income is payable from the insurance carrier (or administrator) as commissions (percentage of premium) to your financial institution on a monthly basis.
Your vendor may also offer a profit-share arrangement. We strongly recommend embracing this option. In this scenario, some, or all, of the earned premium reserves are paid out annually to your institution. Note: These can change each year based on the actual loss ratios.
If you choose the self-insured option, your institution both sets the rates and retains 100% of the price charged.
However, as most lenders do not want to take on both the risk and administration functions of the plan, they work with a vendor. For a fee, this insurance-licensed entity will set up a Contractual Liability Insurance Policy (CLIP) between your institution and an insurer.
Risk then shifts from your financial institution to the insurance company.
Debt Cancellation contracts also allow for profit-share arrangements, providing income on the front and back-end.
Self-Insured or Provider Insured?
While the self-insured option appears to provide more profit potential, you have to take into account the cost of insurance and any non-tangible costs of administration. This will also play a role in how you set the overall cost and mark-up of the protection product offered to your borrowers.
Credit Insurance or Debt Cancellation?
There’s no one option which is superior to the other. Choose credit insurance if you prefer:
- More regulated product (limited ability to adjust rates)
- Nationally-consistent coverages
Choose debt cancellation for:
- Less regulation (adjust rates and fees to fit goals)
- Wider range of coverages
Both allow for profit-sharing agreements.
Get Some Help & Keep Learning
Our company, GreenProfit Solutions, can help you evaluate, choose, and implement a program best suited for your institution and borrowers. Set up a 15 minute no-nonsense chat to see if that makes sense.
Of course, you may always learn more about Payment Protection and a range of other topics on our Learning Library. Subscribe to ensure you don’t miss any new content and have a voice on our future topics.
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