Consumers overbilled for credit insurance

Maryland, 5 other states listed for the best deals

November 25, 2001|By KNIGHT RIDDER/TRIBUNE

Borrowers should be wary any time they are asked to sign up for credit-related insurance, but some versions of the policies are far worse deals than others, according to a new study by two consumer organizations.

How bad are they? The study said consumers have paid about $6 billion a year over the past five years for credit insurance - and paid $2.5 billion too much for it, using standard industry formulas for comparing premiums to what the insurers paid out in claims.

But there was good news, too, in the study by the Consumer Federation of America and the Center for Economic Justice.

Residents of Maryland, Pennsylvania, New Jersey, Maine, Virginia and New York received relatively good value for two of the most prominent credit-insurance products: credit life and credit disability, which pay off loans when consumers die or become disabled.

In those six states, the insurers at least came close to paying off 60 cents in claims per dollar of premiums - a threshold set as a minimum reasonable benefit in a model credit-insurance statute developed by the National Association of Insurance Commissioners.

Those are not unreasonable targets, especially when compared with claims-vs.-premiums ratios (insurers call them "loss ratios") for other types of insurance.

Historical loss ratios for automobile insurance average more than 65 percent.

For group health insurance, the ratio is 75 percent; and for group life, it is 85 percent.

Even in states that do relatively well with credit-life and credit-disability insurance, the claims-vs.-premiums ratio was often worse for other kinds of credit insurance, said Birny Birnbaum, co-author of the study and executive director of the Center for Economic Justice in Austin, Texas.

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