The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL


Opinion No. 6692

August 15, 1991

BANKS AND BANKING:

Purchase of credit life insurance by lender

A bank or credit union chartered under state law may purchase, with the institution's funds, life insurance on individuals who borrow money from the institution with the consent of the borrower to the purchase of the policy naming the lending institution as beneficiary.

Honorable Curtis Hertel

State Representative

The Capitol

Lansing, Michigan

You have asked my opinion on a question which may be phrased as follows:

May a bank or credit union chartered under state law purchase, with the institution's funds, life insurance on individuals who borrow money from the institution with the consent of the borrower to the purchase of the policy naming the lending institution as beneficiary?

You state that this question "assumes that a borrower would be required to consent to the purchase of the policy and to the lending institution's being named a beneficiary of the policy."

This office has been advised that your question contemplates the purchase of an individual whole life insurance policy on the life of the borrower at the lender's expense, to be purchased at the inception of the loan or at any time the lender deems himself insecure during the loan term. The insurance policy would be purchased in connection with the borrower's indebtedness to the lender with the lender recouping its costs for the purchase of this whole life policy out of the cash values generated under the policy. It is clear that the contemplated activity involves credit life insurance, with the lender as the creditor and the borrower as the debtor.

State Chartered Banks

Section 151(a)(16) of the Banking Code of 1969, MCL 487.451; MSA 23.710(151), sets forth the permissible business of state chartered banks and delineates certain corporate powers. Section 151(a)(16) provides that:

(a) Subject to the limitations and restrictions contained in this act or in a bank's articles, the bank may engage in the business of banking and a business related or incidental to banking, and for that purpose, without specific mention thereof in its articles, a bank has the powers conferred by this act and the following additional corporate powers:

 

 

(16) To make application for and to obtain insurance of loans, but not to operate an insurance underwriting business. [Emphasis added.]

Thus, a state chartered bank is expressly empowered to apply for and obtain insurance on the loans it makes.

State Chartered Credit Unions

The powers of state chartered credit unions are set forth in Sec. 4 of 1925 PA 285, MCL 490.4; MSA 23.484. Section 4(2)(aa) provides that:

(2) A credit union may do all of the following:

 

 

(aa) At the expense of the credit union, purchase insurance for its members in connection with its members' share, deposit, loan, and other accounts. [Emphasis added.]

Thus, a state chartered credit union is also expressly authorized to purchase insurance on loans to members.

Credit Insurance Act

Life insurance in connection with a borrower's indebtedness is subject to the Credit Insurance Act, MCL 550.601 et seq; MSA 24.568(1) et seq, except life insurance sold in connection with loans on dwellings or mobile homes when the term of the loan is over five years. Section 2 of the Credit Insurance Act, provides that:

All life insurance and all accident and health insurance sold in connection with loans or other credit transactions shall be subject to the provisions of this act except such insurance sold in connection with loans on dwellings or mobile homes where the term of the loan is in excess of 5 years. [Emphasis added.]

The Credit Insurance Act envisions the possibility that a creditor may pay for the policy. Section 9, for example, provides in pertinent part that:

Each individual policy or group certificate of credit life insurance ... shall set forth ... the amount of payment separately in connection with credit life insurance and credit accident and health insurance if an identifiable charge is made to the debtor.... [Emphasis added.]

Section 18 of the Credit Insurance Act provides in pertinent part that:

If a creditor requires a debtor to make a payment in connection with credit life insurance ... and an individual policy or group certificate of insurance is not issued, the creditor shall immediately give written notice to such debtor and shall promptly make an appropriate credit to the account. [Emphasis added.]

The language "if an identifiable charge is made to the debtor" and "if a creditor requires a debtor to make a payment in connection with credit life insurance" clearly indicate that the debtor need not be required to bear the cost of the credit life insurance.

However, the Credit Insurance Act limits the form of individual policies of credit life insurance issued to debtors to the "term plan." Section 4(a) of the Credit Insurance Act expressly provides that:

Credit life insurance ... shall be issued only in the following forms:

(a) Individual policies of life insurance issued to debtors on the term plan; [Emphasis added.]

Term insurance covers those losses occurring before the expiration of a stated term, which in the case of credit insurance is approximately the duration of the loan indebtedness. OAG, 1979-1980, No 5722, p 834, 835 (June 18, 1980).

Section 5 of the Credit Insurance Act limits the permissible amount of credit life insurance under the act by providing the following:

The amount of credit life insurance shall not exceed the indebtedness. Where indebtedness repayable in substantially equal installments is secured by an individual policy of credit life insurance the amount of insurance shall not exceed the approximate unpaid indebtedness on the date of death.... [Emphasis added.]

The limitation on the amount of credit insurance is further reinforced by section 9, which provides in pertinent part that:

Each individual policy ... of credit life insurance ... shall state that the benefits shall be paid to the creditor to reduce or extinguish the unpaid indebtedness and, wherever the amount of insurance may exceed the unpaid indebtedness, that any such excess shall be payable to a beneficiary, other than the creditor, named by the debtor or to his estate. [Emphasis added.]

In summary, the Credit Insurance Act requires that individual policies of life insurance issued to debtors may only be issued on a "term plan." The creditor is the beneficiary only to the extent of the unpaid indebtedness, and any excess benefits inure to the debtor's designated beneficiary, other than the creditor, or to the debtor's estate.

Loans Not Covered By Credit Insurance Act--Insurable

Interest Requirement

For loans not covered by the Credit Insurance Act, the purchase of a whole life insurance policy on the life of the borrower must be in an amount reasonably proportionate to the amount of the indebtedness or the insurer may challenge the contract as lacking the requisite insurable interest. The measure of what constitutes an insurable interest has been stated as follows:

The test of a creditor's insurable interest is whether the amount of the debt is reasonably proportionate to the amount of the insurance for which he contracts. If the debt is so small as to be out of all proportion to the amount of the insurance, the creditor lacks insurable interest and the contract of insurance is nothing more than a wagering scheme. [Emphasis added.]

Couch on Insurance 2d Rev ed, Sec. 24:155, p 255.

Thus, the amount of life insurance purchased would be limited to the extent of the lender's insurable interest, which is measured by the extent of the indebtedness.

Conclusion

It is my opinion, therefore, that a bank or credit union chartered under state law may purchase, with the institution's funds, life insurance on individuals who have borrowed money from the institution with the consent of the borrower to the purchase of the policy naming the lending institution as beneficiary.

The purchase of such insurance, except in connection with loans on dwellings or mobile homes where the term of the loan is over five years, is subject to the provisions and limitations set forth in the Credit Insurance Act, supra. Under the Credit Insurance Act, supra, the insurance would have to be term insurance limited in amount to the extent of the indebtedness. As to those loans not covered by the Credit Insurance Act, supra, the lender may in good faith purchase an individual insurance policy with its own funds on the life of its borrower in an amount reasonably proportionate to the indebtedness.

Frank J. Kelley

Attorney General