Nonprofit Warns on the Perils of Add-On Insurance

How much damage can seller kickbacks do? A great deal, The Consumer Federation of America reports.

The nonprofit says consumers across America "are buying overpriced and often unneeded insurance," including mortgage related insurance, habitually driven by seller kickbacks.

It urged borrowers to be cautious about buying insurance from those selling anything from homes and cars to furniture, electronics and travel-related insurance.

And in the new world we live in these customer warnings are not for borrowers or credit counselors alone.

The foreclosure crisis has created a shortcut that keeps servicers' and borrowers' bottom lines, or financial loss risks, closely connected.

More than ever in the past borrower mistakes—including stretching their resources too thin by getting an unnecessary insurance—are bound to weigh on servicers' bottom line by way of resulting in foreclosures that add to an already large real estate-owned property inventory.

CFA's director of insurance and former Texas insurance commissioner and federal insurance administrator, J. Robert Hunter, cautions that insurance "offered in conjunction with the sale of other products" is often not needed or can be purchased much less expensively from other sources if it is indispensable.

Hunter says the people who sell this unplanned insurance usually are paid on commission or other financial incentives that drive up the price, "making the insurance relatively expensive" due to what is often labeled as "reverse competition."

During such sales the sellers of the primary product compete for the highest kickbacks that "can more than double the price of the insurance."

The validity of "add-on" can be measured by responses to three key questions. CFA suggests inquiring whether the insurance is really necessary. If so, whether coverage already is available in routine insurance policies such as life, disability, home or auto insurance. If no, are there other less expensive options an insurance company or agent can identify?

CFA places high on the list of types of insurance homebuyers or those who have a loan modification "may want to avoid" credit insurance and title insurance -- because they may not be necessary or might end up being too costly because of large kickbacks to the seller.

In fact, title insurance sold at the closing of a home—either a lender's policy or an owner's policy—is seen by many as necessary. The insurance required by mortgage lenders and paid by the buyer protects the lender for the loan amount and an owner's policy protects the buyer up to the purchase price of the property.

Many anecdotes are being told by the media, at conferences and even at the kitchen table about legal issues faced by servicers of distressed mortgages because of title ownership and title insurance mishaps. So the main benefit of title insurance is in guaranteeing that the title ownership is sound, defends the buyer against challenges to their title, and compensates the buyer and the lender if there is a problem with the clear ownership of the title.

CFA states that over the past 30 years "numerous studies have documented how inefficiencies in the title insurance market have harmed consumers through excessive premium prices."

From the borrower side it means they may not be aware title insurers market/advertise their products to real estate professionals such as real estate agents, mortgage lenders, mortgage brokers and homebuilders, "who often" steer consumers to a particular title agent or title insurer that "usually richly compensates" for the referral. As a result title agents and title insurers who compete for their business drive up prices.

All of the above indicate homebuyers and those in search of refinancing or a loan modification must shop for the best-priced title insurance. So borrower education that targets insurance needs can help all parties that share the mortgage default risk.

CFA raises another red flag about the credit or debt cancellation "sold in conjunction with the purchase of a home, car or other products requiring a loan to fund."

Credit insurance can cover death (credit life insurance or mortgage life insurance when it is covering a home), loss of job (credit involuntary unemployment insurance) or other events through policies that "usually pay very low benefits to people with claims" at an average of less than 40 cents for each premium dollar. (The ratio tends to be higher in states like New York and Vermont and on most policies sold by credit unions.)

Hunter recalls cases where large life insurance company executives describe their inability to pay big kickbacks to insurance salespeople as lack of competitiveness or very low rates applied by their company.

As to what would be adequate, Hunter says borrowers should "think twice before purchasing credit insurance that returns less than half of policyholder premiums as benefits."

CFA tips start with taking the time to read and consider every detail, asking for information and not succumbing to pressure to buy the insurance right away; deciding if the insurance is necessary; and asking if that protection is already in place through another insurance policy since in the end nobody can collect twice for the same claim from two policies.