Many installment sellers and consumer finance companies offer ancillary credit insurance products. Such products may include credit life, credit disability or credit unemployment insurance. Except with respect to required property insurance in connection with secured transactions, the sale of these other ancillary insurance products must be voluntary in order to be excluded from Finance Charge under the Truth-in-Lending Act (TILA).
There is a uniform disclosure that software companies and insurance companies have used over the years to meet the disclosure requirements of TILA to keep the charge for such insurance from being Finance Charge. The disclosure basically contains three components:
The absence of any of these three elements will make the charge for the credit insurance product part of the Finance Charge; and, the result of this fact, will affect not only the Finance Charge disclosure, but also the disclosure of the Annual Percentage Rate and the Amount Financed.
Property insurance may often be required in secured transactions. The theory here is that the creditor is depending upon the value of its collateral to help secure the repayment of the debt, and to this end, the creditor is entitled to have its collateral insured. Still, there are requirements and restrictions with respect to property insurance in consumer credit transactions.
Practice Pointer: If you haven’t reviewed your insurance disclosures recently, it is time to take a look at the language of your contract forms and, if appropriate, discuss the same with your insurance provider and your software provider.