Many dealerships have stopped offering credit life and disability because some states have lowered the rate stores can charge, trimming F&I profit margins, and because other products offer more concrete value to car buyers, dealers and F&I experts say.
Even so, Hornbuckle says, credit life and disability insurance remains a core product at his store. He explained why recently to Staff Reporter Jamie LaReau.
Q: Why are you so good at selling credit life and disability policies?
A: The key to our success is really offering it each time. If you offer a product each time, you're going to have higher penetration. Our mentality is you should explain it as if you were explaining it to a friend at a party. I would say: "The way it works in most states is your family is responsible for your debts if you die. This will pay your car off. So your family wouldn't be responsible for that debt and they'd be able to keep the vehicle." It's a very simple explanation.
How many credit life policies do you sell each month on average?
We sold 185 total policies in 2011. The average premium was $726 on credit life and disability policies per month. The average term is 63 months. In 2010, we had a 12 percent life penetration. In 2011, it was 11 percent life penetration.
What coverage do most people choose?
Typically, decreasing benefit coverage. So just like on your car, a loan goes down over time. So in this case, the death benefits will go down corresponding to that. The idea is that if you were to pass away during your loan, whatever the payoff is would be the death benefit. You do get paid a little bit more than that because it's the number of payments you have left, so there's interest.
The other option would be level life. That means the level doesn't change. So whatever your initial loan amount is would be the total amount of the benefit paid.
Is level life more expensive?
Yes. The higher the death benefit is, the greater the cost to the insurance company. On average the premium is about 40 to 50 percent more for the level life.
How profitable is credit life?
In Louisiana, the dealer retains 50 percent of the premium. But we're also responsible for claims participation, meaning we're party with the insurance company. So we retain a portion of the liability. It's a core product, but ... it does not achieve the same profit level that you would get on a service contract, GAP insurance or on financing with the finance reserve.
But the key is that if you are going to offer it, you have to offer it to everybody. We achieve penetrations of 10 to 12 percent on all our finance buyers. We finance about 75 percent of our vehicles. At a lot of stores, that number is probably half that. I don't think credit life insurance is dead yet, but it's on life support.
Why is it on life support?
It was at its peak in the 1970s and 1980s. There are a lot of laws of disclosure now, and when you disclose things in a certain way, it can deter people from purchasing those things. Also, the average consumer is more educated and has made up their mind prior to talking to the F&I manager.
What type of customer buys it?
The people who buy it are the ones who feel they have a need for it. There's no credit life buyer, so to speak. It varies from the younger and to the older.
Why do they buy it?
They don't want their family to be responsible if something happened to them. So for $20 or $30 a month, they don't have to worry.
Has anyone had to cash it in?
We've definitely had people who were very fortunate to have had it. I've had people come in and say, "I am not doing a deal unless I have that coverage" because they had it the other way where they lost a spouse and it was quite a burden.
What are the restrictions?
We use First Assurance based in Baton Rouge. They have age limitations. They want you to be no older than 70 when the policy expires, so on a five-year loan the customer has to be 65 when it started. But it all varies from company to company and state to state.
Do you advertise or do social media marketing of credit life?
We don't do that because I don't necessarily want people to negotiate those things into a deal. We'd like them to make a decision on the vehicle and then know their options.
Do lenders restrict selling credit life?
Typically, you can roll it into a loan. But more and more banks have limitations on how many back-end products you can have. We present everything to the customer and let them decide what's most important.