Question

Life insurance companies require applicants to submit to a physical examination as proof of insurability prior to issuing standard life insurance policies. In contrast, credit card companies offer their customers a type of insurance called “credit life insurance” that pays off the credit card balance if the cardholder dies. Would you expect insurance premiums to be higher (per dollar of death benefits) on standard life or credit life policies? Explain.

Answer 1

Solution

I expect the insurance premiums to be higher on credit life when compared to the normal life insurance policies.

This is because in case of normal life insurance the premium is charged based on the examination (i.e., current health condition).Here,the insuree(applicant of insurance) is transfering his/her risk/ uncertainity to the insurer(i.e., insurance company) by paying a definite amount (i.e., insurance premium).Probability of uncertainity is evaluated /forecasted by the insurance companies based on the current situation of the applicant,so the premium would be less.

In case of credit life insurance,that pays off the credit card balance if the card holer dies,the preimum would be comparitively higher because here the risk of applicant dying is not examined.Plus the risk is considered to be higher as debt cannot be inherited.So,the marjet for credit-life is itself is risky.So,the premiums charged are also generally higher.So,that is the reason why lenders while providing the loans include the premium on credit-life insurance as a part of loan repayment amount.