Whatever Happened to Credit Life?

There was a time when credit life and disability insurance was the No. 1 product sold in the F&I office. In fact, for the better part of the 1970s and ’80s, it was the only product. When John Braganini, principal at Great Lakes Companies in Kalamazoo, Mich., entered the auto retail channel in 1986, credit life was still king.

“At the time, dealers here in Michigan limited their F&I product offerings to credit insurance, service contracts and appearance products such as rustproofing and paint sealant. Some accessories and other related products were offered at various dealerships, but the three mentioned above, along with bank reserve, provided the F&I landscape,” Braganini recalls. “The service contracts and appearance products were often priced and administrated in a manner that led to performance issues, so credit insurance was often the primary income source for F&I.”

Since their inception, credit life policies have been designed to continue making payments on an auto loan if the car buyer dies or becomes disabled or seriously ill. Braganini describes them as a “simple value proposition” for customers. For a modest premium, which can be financed along with the loan amount, customers who opt for credit life coverage, disability coverage or both are relieved of what could be a major financial burden when disaster strikes.

Credit life began to lose its luster at the turn of the 21st century, when regulatory changes limited its income potential in some states and dealers and agents began to see more value in products such as vehicle service contracts, GAP coverage and appearance protection. Several large providers, including Zurich and JM&A, pulled out of the segment.

But many others remained, and advocates say credit life still represents a tremendous value to dealers and end users and deserves a seat at the F&I table.

Licensing and Rates

“As one of our people likes to say, our industry put the ‘I’ in ‘F&I,’” says Richard Kizer, chairman of Central States of Omaha (CSO) in Omaha, Neb. “In the early years, the F&I department would help people secure loans and present them with credit life insurance. They needed to borrow money and needed protection on their loans. So the product was offered a high percentage of the time and our penetrations were very high.”

Today, sellers of credit life and disability insurance must be licensed by the state or states in which they operate. Some states allow the dealer to establish an entity and maintain the license; others mandate that everyone involved in the sale be licensed. Kizer doesn’t take issue with licensing requirements but says they have restricted sales in some states.

“There are a handful of states, including California and New York, where they have made the licensing of that employee in the F&I office very difficult,” he says. “They may have to get fingerprinted or take a test or have continuing education. And we know there is a fair amount of turnover in F&I.”

The commissions dealers earn from selling credit life and disability are determined by “prima facie” rates set at the state level. Sellers can go below the established rate but may not exceed it.

“Back in the ’70s and early ’80s, the rates for credit insurance ranged anywhere from 70 cents up to 90 cents per 100,” says Arden Hetland, president of The Woodlands, Texas-based American Financial & Automotive Services (AFAS). “Louisiana was at 110% for joint life. So the rate was high and commissions were high.”

Things began to tighten up, Braganini says, beginning in the late 1990s and continuing through the early 2000s.

“The landscape changed. One by one, states began reducing the price that could be charged for credit insurance. Many states reduced the price to the point where commissions had to be reduced to 10%.” As a result, and in combination with the emergence of competing F&I products that did not require licensing and could be marked up, Braganini adds, “credit insurance started getting lost in the shuffle.”

At Pekin Insurance in Pekin, Ill., Jay Holloman brings more than 30 years of experience in the credit insurance field to his position as director of financial products. He says credit life’s decline was accelerated by a regulatory change in the housing segment.

“In the early 2000s, the federal government decided to treat single-premium credit insurance as points and fees in its definition,” Holloman says, so banks were no longer able to finance credit life and disability in mortgage-backed loans. “A lot of people were using a second mortgage to buy a vehicle. We couldn’t offer the credit insurance, so our business was greatly reduced.”

Determined to stay in the game, Holloman and his management team decided to expand their geographic footprint. With the help of a network of agents, Pekin rebounded. The company now offers services in 21 states and counting.

“It has been a rocky road,” Holloman admits. “We went from writing as much as $20 million down to $8 million. Last year, we turned $19.2 million. There is a huge need for the product in our society and for our economy.”

Sales and Reinsurance

Not everyone agrees that the arguments listed above are strong enough to make room for credit insurance on the F&I menu. By the time Brian Crisorio, vice president of marketing for United Development Systems Inc. (UDS), joined the company on a full-time basis, the role credit life would play in the company’s future was already in doubt.

“As the young blood in our organization at the time, I was the one pushing to cut ties with credit insurance,” Crisorio says. “It’s a generational shift. I wasn’t around when it was one of two products available and one of the main sellers and profit contributors. When I looked at the total landscape, I saw that we had all these other products that made more sense.”

In Crisorio’s home state of Florida, he adds, the numbers just didn’t add up. He agrees that the product represents a good value to some end users but says the company had to make a business decision based on the needs of its dealers.

“It didn’t seem like the smartest thing to be pushing it for sales. I think what it all came down to was that a lot of our business is done in Florida and the pricing was too high, the profit was too low and there were too many other good options to take up real estate on the menu.”

Kizer points to Texas as one state in which the sale of credit life and disability can produce “substantial” income for dealers. Using a hypothetical loan amount of $25,000 at 6% interest over a 72-month term — and using round numbers — he calculates the cost of credit life at $450 and disability at $950 for a total premium of $1,400, assuming the car buyer opts for both types of coverage. Texas has a “floating cap” on commissions, meaning the selling dealer would earn somewhere between 30% and 45%, depending on the loss ratios they have generated.

“Texas is on the low side as far as rates are concerned,” Kizer says. “They have good penetrations. Some states have hard caps and some have floating caps. It all comes down to loss ratios but it’s still good income for the dealer. What can be so confusing from state to state is regulation. But if a dealer and the folks in the F&I office are committed to presenting the product, then it does generate significant fee income. If a state makes licensing difficult or makes the commission rate extremely low, the dealer loses the incentive to sell it properly.”

He acknowledges that a portion of the income dealers make from credit insurance goes toward the cost of the F&I manager’s time and compliance training, but the more policies sold, the more those per-deal hard costs are defrayed. And then there’s reinsurance.

“Some states, like Nebraska, have a hard cap,” Kizer says. “Our commission cap is 30%. What dealers in such states will frequently do is invest in captive reinsurance companies and take underwriting risk on their product.”

Dealers who elect to offer below-rate credit insurance are following the lead of credit unions, as Kizer and Hetland pointed out, many of which subsidize the sales of the product to protect their own interests as well as their members’ ability to obtain credit in the future.

“It’s a different mindset,” Kizer says of credit unions. “They will sell it at a lower rate and take a lower commission.”

“Despite all the changes, we continue to produce significant sales volume with credit insurance,” Braganini says. “One of the primary reasons is that we are one of the few agencies that have providers, licensed sales executives and a compliance department to fulfill the regulatory requirements. Most of the national F&I providers outsource everything but service contracts, GAP and tire and wheel. As a result, providers that have focused solutions can consolidate their market opportunities.”

“We still provide credit insurance because, if it’s on a menu, that’s a great value,” Hetland says, particularly for car buyers who are 40 and older. Consumers in that age group have a higher risk of death and illness, but the rates set by the state don’t vary with age, and the policies don’t require a physical exam or a lengthy health assessment. “There is very little underwriting. You might have to say you’re not having a heart attack or fighting cancer, and that’s it.”

Kizer points out that, if every car buyer walked into the F&I office with a robust life insurance policy in their back pocket, credit life would be a harder sell. At the moment, on a nationwide basis, that is not typically the case.

“Four out of 10 Americans do not own life insurance,” Kizer says. “Only 35% of low-income households and 54% of middle-income households have whole or term life insurance.” He recalls a story told to him by a banker about a young woman whose recently deceased husband had, unbeknownst to her, added credit life to his auto loan. “The husband was the primary breadwinner and he got in a wreck and died. His wife came in crying to the loan officer, thinking she was still responsible for the loan. The banker told us, ‘I can’t tell you what a great experience it was to tell the widow that the loan was insured.’”

Compliance Issues

If nothing else, our experts said, credit life and disability is a product that has been through the regulatory ringer so many times, it’s practically unassailable.

“When I started, there was no disclosure of any of the F&I products on the buyer’s order, bank contract or vehicle registration documents,” says Braganini. “All incremental products were rolled into the selling price of the car and it was ‘convenient’ to include life and disability into every loan quote. Consumers would get a loan that ‘included protection.’”

Clearly, thanks to the nationwide campaign against payment packing that began more than a decade ago, that is no longer an option. Another challenge was mounted by class-action attorneys who went after dealers for failing to refund the premiums to customers who canceled their credit insurance policy or traded their vehicle.

“A lot of them just didn’t do it,” Hetland says. “The class-action attorneys went after lending institutions and insurance providers. What they found is the lenders would not let the insurance company — because of privacy laws — tell them when cancelation took hold. Now the language has changed to say it is the responsibility of the policyholder to notify the insurance company.”

As indications that the Consumer Financial Protection Bureau (CFPB) will attempt to regulate the sale of F&I products continue to pile up, our experts said, credit insurance — with its state-mandated rates and commissions — stands out as an F&I product with a rock-solid pricing structure.

“You really hedge your bet against the CFPB with credit life on the menu,” Hetland says. “How can they say the state is wrong? And you can justify loss ratios because a lot of the ancillary products don’t have high loss ratios.”

“The way the CFPB is trying to back-door dealers, when you look at most of the products, they’re being insured based on debt protection like GAP. It’s a debt waiver,” Holloman adds. “If a dealer is really worried about compliance and the financing arms of their operations, credit insurance is one of the natural ways they can improve income on each vehicle. With credit life, you have a product that is out of the reach of the CFPB from that standpoint.”

“Price controls may become a reality with other F&I products,” Braganini adds. “If that happens, those who are positioned to execute an effective credit insurance strategy will have an advantage over those who cannot or will not.”

Crisorio remains unconvinced. “Here in Florida, almost all our products are regulated by the state. The only ones that aren’t are paint, GAP and key, which our dealers regulate internally. It’s in the operations manual.”

The Value Proposition

Asked whether demand from dealers would change his mind, Crisorio says he’s simply not aware of any. The only dealer on his roster who sells credit insurance was already doing so when UDS captured the business.

“There are certainly parts of the U.S. where credit insurance is viable, and there may be small pockets where we operate,” Crisorio says. “But it’s not rewarding enough to pursue.”

Those who remain in the credit life and disability business say the rewards are better framed in terms of the dealer’s value proposition than income potential. As Kizer points out, protecting the customer’s financing ensures future business.

“We feel this protection is very important and should be offered. You’re protecting the life and health of your customer,” he says. “Isn’t that more important than key replacement or dent and ding?”

Holloman points to a 2012 study by Thomas Durkin and Thomas Miller that made the case for credit insurance, particularly among older borrowers who are underinsured, and stressed the need to allow consumers to make their own decisions.

“The individual should have the opportunity to decide whether they want to purchase it or not,” Holloman says. “They don’t want it? So be it. But if you look at the Durkin study, they see the value and would purchase if they were offered it.”

“Credit life and disability is an exceptional value to the customer,” Hetland adds. “It’s good underwriting because the dealers are in reinsurance. And it really helps safeguard against the CFPB. We can’t knock that. It’s a good value.”