What Do You Mean, No Credit Insurance?

I recently bought a car and I decided to finance the car through the dealer because of the great rates that were available. The dealer was financing me through a Credit Union I’ve been a member of for years. After some negotiation with the F&I manager, (you know, deciding how much I’d let him make), I added GAP and a service contract to my loan. Then I told him to be sure to add Credit Life. It’s a no brainer for anyone over 50 years old. Credit Life is a good buy for older buyers because the premium isn’t inflated by age. It’s certainly the cheapest term insurance I can buy.

But I was shocked when the F&I manager said “I’m not allowed to sell credit insurance”. Now, since the dealer was financing me through my own Credit Union, I can just as well walk into my local branch and get the same rate the dealer gave me. I was just letting the dealer get a flat fee, make a little money on the deal, and save a trip to the Credit Union.

But since the dealer doesn’t sell Credit Life, if I wanted it, (and I did), I would have to refinance the loan directly with the same Credit Union. Of course, if I were a normal customer who went to the Credit Union, the dealer would lose the finance income, GAP, and almost surely the service contract.

Now, I understand that service contract sales are the main focus of most agents, and every dealer has the right to offer what they choose. And licensing can be an added chore. But not having a product available that many customers clearly will buy misses an additional profit opportunity.

Since the “big box” F&I product providers have stopped underwriting Credit Insurance, they focus mainly on service contracts. That’s where they make their money so that is where they focus their processes and training.

Are customers still buying Credit Insurance?

The short answer is yes, and some by fairly impressive numbers. Certainly, our monitoring of many of the country’s top performers shows some impressive penetrations of Credit Insurance sales.

But it can depend on who you ask and where you are. In some states, California, New York, and maybe a couple of other states, state regulations have made the product so expensive, cumbersome, or unprofitable for the dealers they don't offer it. But in Texas, the Midwest, Northeast, and much of the West, it is still quite popular.

Isn’t Credit Insurance too expensive these days?

Not when you analyze the risk it covers. GAP, for instance covers the difference between the insurance company's settlement and the payoff. And service contracts pay only for repairs. Credit insurance, however, has the potential to pay off the entire loan. And when you analyze the amount paid out in claims, Credit Insurance gets used.

The premiums charged for credit insurance are set by the states insurance departments. Their calculations are usually determined by loss ratios, in other words, how much premium is paid out in actual claims to consumers. They look at how much the insurance company pays out, allow reasonable fees and commissions, and set the price accordingly. One advantage of that process is that there’s no chance of discrimination or “disparate impact” when the state sets the premiums.

You might be surprised at how many claims get paid to people who find they really need the coverage. Here are a couple of actual comments from a claims survey conducted by a major Credit Insurance Company recently:

“My husband was diagnosed with Stage 4 lung cancer in Jan. and passed in Sept. this year. This insurance was very helpful”.

“After my disability I was able to keep my car and motorcycle. Thank you for this help. It took a lot of stress out”.

They get hundreds of those kinds of comments from customers.

Won’t that big payment bump affect the sales of other products?

Believe it or not, offering Credit Insurance with our Package Option™ process actually increases service contract sales. Our process capitalizes on the customer's security driven responses and reluctance to eliminate more than one or two products when presented in the Package Option™ format. Many of them will drop the A&H, maybe the Life but keep everything else. Good deal. But a side benefit of this strategy is that you end up posting some pretty healthy Credit Insurance penetrations.

Another factor we have measured is that dealers who don’t offer Credit Insurance may not be replacing those products with other security driven products. A commonality among underperforming F&I departments is a reliance on finance reserve, service contracts, and maybe a little GAP as the total source of department income.

The charts below show the product vs. income numbers from a select group of dealers in one particular Dealer 20 Group study. These numbers do not include the very top or bottom performers, just the above average and below average performers in the middle.

Will today’s customer actually buy Credit Insurance?

The overwhelming evidence says they will, if you know how to present it. And the most immediate and catastrophic threats to most customer’s economic welfare are either the vehicle being totaled leaving an outstanding balance (GAP), a death of one or more of the buyers (Credit Life), or a long term disability and loss of income (Accident and Health Coverage). And they know that.

I could go on and on about why today’s customer will buy Credit Insurance, but the simple answer is that if dealers don't present a product to a customer, they probably won't buy it.  And that works pretty well for dealers who don’t offer enough security motivated products.

This was demonstrated in one of our surveys of new car buyers:

"Over 50% of buyers who did not purchase Credit Insurance, surveyed at 45 days after purchase, said it had not been offered. Nearly half of those said they would have purchased either life or A&H when informed of the approximate monthly cost".

How do our dealers integrate Life and Disability into their presentation?

First, it has a lot to do with the strategy of our Package Option™ process. Now, I don't want to oversimplify how our process works, but those of you who have attended our training know that we present all of the products in our packages and then allow the customer to control the process of modifying and building their packages. This is particularly effective when presenting “fear of loss” type products.

Our process reduces the payment by peeling off the Credit Insurance products first. The first to go is A&H followed by the Life. This approach would make it seem like we don't want to sell Credit Insurance. However, what we are really doing is using Credit Insurance as a sacrificial lamb to give the best chance of hanging on to the other products. But our dealers also sell a lot of Credit Insurance as an added benefit.

Should you encourage dealers to present Credit Insurance?

In states where it makes sense, Credit Insurance can be a valuable addition to your dealers’ product line and a blessing to those customers who need it. Certainly, the Package Option™ method can help you do that. In many top F&I departments, Credit Insurance is still an integral part of an overall strategy that is producing those top results.

Make sure your dealers aren’t missing that opportunity. Making me refinance at the Credit Union, just to get Credit Life, doesn’t make a lot of sense.