MR Microinsurance_2012_03_29.indd - International Labour ...

198 Life insurance
9.1 What is credit life insurance?
Credit life insurance is among the most common types of microinsurance (Roth
et al., 2007; Matul et al., 2010).The primary purpose of this product is to ensure
that the outstanding debt is extinguished if a borrower dies. The product is typically
mandatory as a precondition for obtaining a loan from microfinance institutions
(MFIs). 1 The product can, however, be designed in different ways and
provided through a variety of institutional arrangements.
9.1.1 Types of credit life cover
Basic credit life, which covers only the principal and interest of an outstanding
loan on the death of the borrower, is the simplest form, though it can be
structured in a variety of ways. Premiums, for example, may be paid up-front,
either deducted from or added to the loan, or they may be factored into the
loan interest rate and collected throughout the loan period. When they are
integrated into the interest rate, borrowers are often unaware that they have
cover.
The lenders’ approach to credit life depends on their objectives. Some organizations
use credit life as a benefit to clients, others as an additional source of
income, and others as a building block of more comprehensive cover. For lenders
interested in the latter objective, they are likely to provide enhanced credit life,
which comes in three variations:
– Enhanced life cover provides the basic cover plus additional benefits such as a
funeral payout.
– Enhanced risks cover includes basic cover plus additional risks such as disability
cover for the borrower, a personal accident rider, or fire cover for business
premises.
– Enhanced family cover expands the basic and sometimes the enhanced cover to
include death or disability of family members.
9.1.2 Institutional arrangements for credit life
There are a number of institutional configurations for delivering credit life.
While the lender is always present as the distributor, the underwriting institution
is typically either a commercial insurer, a member-owned mutual benefit associa-
1 The term “microfinance institution” (MFI) refers to any institution providing credit and sometimes
savings services to low-income markets.