Debt Protection Demand Increases
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While credit insurance and debt protection have been long-time staples for credit unions as part of their loan add-on product suites, some experts noticed that they are becoming more of a priority as the industry continues to seek new noninterest income streams.
Intended to help members facing tough times, credit insurance and debt protection products also produce cash through monthly program fees that are tacked on to members’ principal and interest payments.
Credit insurance, which is typically paired with a consumer or home equity loan, covers a member’s loan payments in the event of injury or illness and it can pay off a loan in the case of death. Debt protection, also intended to complement consumer and home equity loans, can eliminate or reduce loan debt for members in dire circumstances.
CUNA Mutual Group, which currently has 5,068 credit unions using one or both of its credit insurance and debt protection programs, reports that of many of them are placing an added emphasis on these member protection programs.
“If you look at different sources of noninterest income, a lot of them have been reduced for credit unions,” said Dan Kaiser, vice president of lending at CUNA Mutual. “Think of [credit insurance and debt protection] as food in a pantry. They’ve had the food in there and have always used it somewhat, but now, the intensity in which they’re using it has increased.”
Julie Nielsen, a regional vice president for St. Paul, Minn.-based Securian Financial Group, which has 1,350 credit unions using its credit insurance or debt protection programs, also said CUs are zeroing in on these types of programs by stepping up their marketing ante and considering program alterations.
“What we’re seeing is that credit unions are looking to drive greater participation in payment protection plans,” Nielsen said. “For example, some are implementing loan officer benchmark programs. They’re also considering changes to the programs to make them more appealing and affordable for members.”
To aid in building involvement, CUs might have the job of convincing members that a program’s benefits outweigh the burden of a higher monthly loan payment. However, some members may not need to be convinced because in a teetering economy, there’s a greater need for protection, experts have noticed.
“It helps members get through difficult transitions,” Nielsen said. “For example, coverage during a period of involuntary unemployment is, unfortunately, in demand right now. If they can’t make their car loan payment, the car won’t get taken away, and they can still make it to job interviews. It also helps them maintain their credit scores.”
Securian assists its CU partners in driving program growth by providing ongoing training for their staff and offering customized marketing tools, Nielsen said.
Credit insurance and debt protection can provide more than just a strong source of noninterest income. The services protect members’ loans, reduces chargeoffs and delinquencies, and shows members and potential members that their CUs wants to help in uncertain times.
“It provides good risk mitigation because the credit union won’t see that interruption in payments,” Nielsen said. “It also helps the member see the credit union as a valuable partner when it’s needed most.”
The $307 million First Source Federal Credit Union in New Hartford, N.Y. offers credit life and disability insurance through Securian for its auto loans, home equity loans and credit cards. CEO Mike Parsons said the offerings rank toward the top of the CU’s noninterest income sources. In 2010, the programs brought in 26% of its noninterest income. They typically produce between $800,000 and $1 million per year.
The programs have helped First Source lower its chargeoff and delinquency rates while providing an important, inexpensive service to members, Parsons said. The CU’s staff sells the products during a one-on-one loan application process and focuses on educating members about their value.
“Credit unions are looking to enhance their earnings,” Parsons said. “Offering credit life and disability insurance is a great way to do that, and it helps out the members at the same time, so it’s a win-win.”
The $764.9 million Credit Union 1 in Anchorage, Alaska, also a Securian client, said it has seen a year-after-year increase in the percentage of members interested in its debt protection services.
The CU expects more than $1 million in noninterest income from debt protection this year, which is more than twice what the financial institution earned from the product in 2007.
“Debt protection is a strong source [of noninterest income] because you receive the income over the life of the loan,” said Rachel Langtry, vice president of marketing and communications at Credit Union 1. “This creates a stable source of income that has shown tremendous growth year after year.”
“The benefit to the member is peace of mind knowing that if something were to happen to them, they and their family are protected from the burden of monthly loan payments,” Langtry said. “The benefit to us is if a member falls on hard times, we’re protected from default.”
For the $1.9 billion Service Credit Union in Portsmouth, N.H., credit insurance is an excellent opportunity to earn noninterest income and meet the needs of its membership base, which is primarily comprised of servicemen and women, according to Fawn Terwilliger, vice president of lending. Service CU offers credit life and disability insurance through CUNA Mutual for all types of loans, with the exception of first mortgage and home equity loans.
“The demand for credit insurance is typically high for our membership given the military population we serve,” Terwilliger said. “For our members, they don’t have to worry about paying a car loan when they are disabled, especially when regular work disability only pays two- thirds of their monthly salary. This is especially valuable among our military members, who desire this protection for their families.”
Kaiser with CUNA Mutual is expecting to see an increase in revenue flowing into credit unions from credit insurance and debt protection programs. While the programs are not the leading forms of noninterest income for credit unions, they are the fastest growing forms.
He added that based on the March 2011 National Credit Union Roundtable Business Outlook Survey, credit unions are expected to focus on insurance and retail investment services income through 2015. “Out of all the various sources of noninterest income, there’s a consistent, significant interest from credit unions in looking more at these products down the road,” Kaiser said.