PROM Software
Standard Credit Insurance Types
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Credit Life Insurance |
PROM Software supports many types of credit-life insurance methods for closed-end installment loans in our LoanMaker WebService
Products. The more common methods are listed on this page, however, there are other methods available
on special order.
PROM Software has provided the lending and credit insurance industries with credit-insurance premium calculations since 1975 on a variety of platforms from mainframe computers, PC's, handheld computers, and WebService routines distributed over the Internet. |
| Net Life |
This type of insurance provides coverage on the unpaid balance of the loan.
Thus the benefit at any point in the loan is the balance of the loan (providing the loan is not
delinquent).
Several products have been updated to calculate credit life insurance on loans with a 0% interest rate. (Truncated coverage, which provides insurance coverage for some initial portion of the loan term, is available in many insurance plans.) When a benefit is paid as a result of a claim, the amount paid usually is the same as the outstanding balance of the loan. (In the case of loans with a 0% interest rate, the outstanding balance is the same as the sum of the remaining stream of payments.) This type of insurance can be computed on a single-premium basis or a monthly-outstanding-balance basis. |
| Gross Life |
This type of insurance provides coverage on the entire stream of remaining
payments, thus the benefit is the sum of the remaining stream of payments at any point in the loan.
Several products have been updated to calculate credit life insurance on loans with a 0% interest rate. (Truncated coverage, which provides insurance coverage for some initial portion of the loan term, is available in many insurance plans.) When a benefit is paid as a result of a claim, the amount paid usually exceeds the current outstanding balance of the loan, and the excess is passed to the estate of the deceased. Several states no longer allow the sale of gross life insurance, especially some larger states. This type of insurance is nearly always computed on a single-premium basis. |
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Credit A&H (disability) Insurance |
PROM Software supports credit accident-&-health (disability) insurance for
closed-end installment loans.
The benefit is the loan payment, which the insurance company will make if the borrower becomes disabled during the term of the loan. (Truncated coverage, which only covers some initial portion of the loan term, is available in many insurance plans. See also Critical Period A&H Insurance.) This type of insurance can be provided on a single-premium or monthly-outstanding-balance basis. The premium is usually based on a term-based table of rates provided by the insurance company. Rates for terms in between the entries on a table can be computed by interpolation or bracketing. |
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IUI (Job Loss) Insurance |
Involuntary unemployment insurance is calculated in the same manner and A&H
(disability) insurance. It is not as popular as A&H in part because of the cost, and for that reason
is not offered in all of PROM's products..
The PROM 627B LeaseMaker Handheld calculator (which does retail auto loans as well as leases) has full provisions for IUI insurance. |
| Underwriting Limits (Caps) |
PROM Software's credit-insurance formulas contain the ability to implement a
full set of underwriting limits (caps).
There are a number of limits that can be imposed, and some choices available if a loan exceeds one or more limits. If both life and A&H caps are implemented, it is important to check them in the proper sequence because the implementation of one cap (which will reduce the associated premium, thereby reducing both the loan amount and payment) may eliminate the necessity of implementing a second cap. |
| Maximum Life Term |
The maximum term of life insurance. Loans that exceed this term can be 1)
partially insured with truncated insurance for the maximum term (if truncated is allowed in the insurance
plan), or 2) not insured.
For gross life insurance, the maximum is compared to the total of payments. For net life insurance, the maximum is compared to the note amount (initial amount borrowed).
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| Maximum Life Benefit |
The maximum amount of life insurance that can be provided. Loans that exceed
this maximum can be 1) partially insured up to the limit specified, or 2) not insured.
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| Maximum A&H Term |
The maximum term of A&H insurance. Loans that exceed this term can be 1)
partially insured with truncated insurance for the maximum term, or 2) not insured.
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| Maximum A&H Benefits |
There are two benefit maximums that can apply to the calculation of the
A&H premium. Specifying these maximums is optional, and either one or both can be implemented.
(If both are implemented, the more restrictive one will be used to determine the premium.)
1) A maximum monthly benefit: If the payment exceeds this amount, a) a portion of the payment equal to the maximum is insured, or b) no insurance is provided. 2) A maximum total benefit: If the sum of the payments over the A&H insurance term exceed this amount, a) the premium is based on this maximum, or b) no insurance is provided. In case a), the monthly benefit is the full monthly payment, but benefit payments will cease when the maximum total benefit is reach. |
| Single-premium basis | A single premium is calculated at the time the loan is originated to cover the cost of insurance over the entire term of the loan. Typically the premium is added to the loan amount and becomes part of the note amount. |
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Monthly-outstanding -balance basis |
The insurance premium is calculated each month based on the amount of insurance
provided during the month. It is then subtracted from the payment and forwarded to the insurance company
on a month-by-month basis.
This method is used extensively by credit unions and by some banks. Even though this method is called "Monthly-outstanding-balance" or "MOB" for short, it can be used for loans with any payment frequency (e.g., weekly, biweekly, quarterly, etc.). For more information on MOB credit insurance on closed-end loans, see our Tech Letter #1705. |
| Closed-end loan |
A "closed-end" loan is one where the number and amount of the payments are
determined at the start of the loan. This includes "pre-computed" and simple-interest loans.
In comparison, an "open-end" loan is more like a credit-card account where the payment is based on some percentage of the outstanding balance, and many subsequent advances (charges) can be made. |
| Interpolation |
This method specifies that if an insurance term falls between two entries in a
term-based table, the rate used to calculated the premium is determined by interpolating between the two rates
in the table.
For example, if a table of A&H rates lists the 12-month rate as 3.15 and the 24-month rate as 4.17, you would use a rate of 3.66 for an 18-month loan. |
| Bracketing |
This method specifies that if an insurance term falls between two entries in a
term-based table, the higher rate is used to calculate the premium.
For example, if a table of A&H rates lists the 12-month rate as 3.15 and the 24-month rate as 4.17, you would use a rate of 4.17 for an 18-month loan. |
| Truncated coverage |
Many credit insurance plans allow for truncated coverage. Under truncated
plans, the insurance is only in effect for some initial portion of the loan term. Once this portion of
the term has elapsed, insurance coverage stops.
Truncated coverage can be used for life and/or accident-&-health insurance. The term of insurance for life and accident-&-health can be the same or different. (See also Critical-period A&H Insurance.) The Truncated Available column in the Net Life Types and Gross Life Types Tables indicates whether truncated insurance is offered in the indicated PROM product(s). Truncated coverage can be calculated for nearly any type of credit insurance, and a "No" means only that no one has requested that particular credit life type with the truncated option. |
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Critical-period A&H insurance |
Critical period A&H (disability) insurance is not common, but has been in
occasional use for a number of years. It is somewhat similar to truncated insurance, except that the
borrower has a floating period of coverage that can be used anywhere within the loan. (Truncated insurance provides coverage for some initial portion of the loan term.)
For example, a 60-month loan with a 24-month critical period policy would provide up to 24 months of benefits anywhere within the loan term (the stream of benefits does not have to be contiguous). The thinking is that most people never use the entire term of A&H insurance, so having, say, 24 months of A&H available would be more than adequate for a 60-month loan. Because this thinking is correct, however, the cost of full-term A&H insurance is only slight more than that of critical period insurance. |
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Debt-Cancellation Insurance |
Debt-cancellation (sometimes call debt-forgiveness) insurance is a product that
offers the same (or similar) benefits to the borrower as credit insurance.
It is issued directly by the lender (as opposed to being underwritten by an insurance company). Because of this, it is usually claimed that it is not insurance and therefore not subject to regulation by the various states' insurance departments. U.S. federally-chartered banks are specifically allowed to sell this insurance by OCC regulations, however, some states are claiming regulatory authority over the product. Rates are indicated to be in the range of 0.30 to 0.80 / $100 of remaining balance per month, depending upon the circumstances under which the debt can be cancelled. Some plans also allow the debt to be postponed during an illness or disability period. See the ABA Banking Journal White Paper on Debt Cancellation for more information. |
| Benefit codes |
TP for total of payments (gross insurance) Net for net principal balance Net + 0.5 for net principal balance plus 1/2 a month's interest Net + 1 for net principal balance plus 1 month's interest Net + 2 for net principal balance plus 2 months' interest Net + 1P for net principal balance plus 1 payment. Net + 2P for net principal balance plus 2 payments Net + 3P for net principal balance plus 3 payments |
| I&M discount types |
Some states require that credit-insurance single premiums be discounted for
interest and mortality to compensate the borrower for having to prepay the premium. The discount is based
on an I&M discount percentage and formula (both determined by regulation).
None: Not used and/or not applicable. Approximate: Based on 1/(1 + n * discount / 2400) formula. Exact: Exact actuarial discount method. Special WV: Non-compounded discount used in WV only. |
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Gross Life Types |
This is a listing of the most common gross life premium calculation. |
| PROM Type |
Rates expressed as |
Benefit |
Truncated available |
I&M discount | Notes |
| 1 | /$100/year | TP | Yes | Approximate | Most common gross method, widely used. I&M discount recent addition. |
| 2 | /$1000/month | TP | Yes | Approximate | Used in NH, OH, others. |
| 19 | /$100/year | TP | Yes | Special WV | Used only in WV. |
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Net Life Types (Single-premium) |
This is a listing of the most common net-life single-premium calculation methods. |
Life rates expressed per $100 per year, approximate I&M discount
| PROM Type | Benefit |
Truncated available |
Notes |
| 5 | Net | Yes | Classic net plan using rates per $100 per year with optional approximate I&M discount. |
| 509 | Net | Yes | Same as 5 except life rate is converted to equivalent MOB rate using loan term instead of life term (results in a higher premium than 5). |
| 51 | Net + 0.5 | Yes | Same as 5 except benefit is the net balance plus 1/2 a month's interest. |
| 6 | Net + 1 | Yes | Same as 5 except benefit is the net balance plus one month's interest. |
| 62 | Net + 2 | Yes | Same as 5 except benefit is the net balance plus two months' interest. |
| 66 | Net + 1P | Yes | Same as 5 except benefit is the net balance plus one payment. |
| 67 | Net + 2P | Yes | Same as 5 except benefit is the net balance plus two payments. |
| 68 | Net + 3P | Yes | Same as 5 except benefit is the net balance plus three payments. |
Life rates expressed per $1000 per month, approximate I&M discount
| PROM Type | Benefit |
Truncated available |
Notes |
| 7 | Net | Yes | Classic net plan using rates per $1000 per month with optional approximate I&M discount. |
| 71 | Net + 0.5 | Yes | Same as 7 except benefit is the net balance plus 1/2 month's interest. |
| 70 | Net | Yes | Same as 7 except single-premium-rate is based on a no-odd-day loan even if the loan has odd-days (results in a slightly lower premium for loans with long odd days). Method developed for compatibility with older loan processing systems which didn't handle odd-day premium calculations correctly. |
| 705 | Net + 0.5 | Yes | Same as 70 except benefit is the net balance plus 1/2 month's interest |
| 76 | Net | Yes | Uses 7 for non-truncated loans, and 41 for truncated loans with a different I&M discount (special to New Jersey). |
| 77 | Net | Yes | Same as 7 except two I&M discount rates are used for truncated premium calculations (special to Maine). |
| 8 | Net + 1 | Yes | Same as 7 except benefit is the net balance plus one month's interest. |
| 82 | Net + 2 | Yes | Same as 7 except benefit is the net balance plus two months' interest |
| 86 | Net + 1P | Yes | Same as 7 except benefit is the net balance plus one payment. |
| 87 | Net + 2P | Yes | Same as 7 except benefit is the net balance plus two payments. |
| 88 | Net + 1P | Yes | Same as 7 except benefit is the net balance plus three payments. |
Life rates expressed per $1000 per month, exact I&M discount
| PROM Type | Benefit |
Truncated available |
Notes |
| 4 | Net | No |
Special NY exact I&M discount method for old Reg 27A (For loans with terms over 60 months, the life I&M discount becomes the loan interest rate, and the A&H rates are discounted by the loan interest rate instead of the statutory discount.) (Method obsolete.) |
| 9 | Net | No | Same as 4 except benefit is the net balance plus 1/2 month's interest. (Method obsolete.) |
| 10 | Net + 1 | No | Same as 41 except benefit is the net balance plus one month's interest. (Method obsolete.) |
| 12 | Net | No | Similar to 4 except exact discounting calculated on unit periods for loans with long/short first periods. (Method obsolete.) |
| 41 | Net | Yes | Net using exact I&M discount, used in NY (new Reg 27A), CA. |
| 43 | Net + 2P | Yes | Same as 41 except benefit is net balance plus 2 payments, used in VT |
| 45 | Net + 1 | No | Same as 4 except benefit is net balance plus one month's interest. (Method obsolete.) |
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Net Life Type (MOB) (/$1000/month) |
This monthly-outstanding-balance net life premium calculation method is available several LoanMaker products. |
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PROM Type |
Benefit | I&M discount | Notes |
| 11 | Net |
None |
Classic MOB type. Truncated coverage is not generally offered usually because of computational and/or processing difficulties. |