This content was published prior to the combination of Dentons Sirote. Learn more about Dentons Sirote. 

I recently wrote about the value of credit insurance products. See here. But, a fuller explanation may be called for.

The federal Truth-In-Lending Act governs disclosure issues relating to Ancillary Products. “Ancillary Products” is the term given to services or products sold by a creditor in connection with a consumer loan or sale transaction.  They may or may not be considered finance charges and thus factored into the APR, depending upon their “voluntariness.”  (But, for purposes of computing the “Military APR,” voluntariness is not a factor.)  State law governs the permissibility of offering of Ancillary Products.

True credit insurance products are insurance products that protect the creditor first, in the event of non-payment by the debtor coupled with a triggering event that is the subject of the credit insurance product (for example, death, disability, or involuntary unemployment).  Payment based on a triggering event is made to the creditor—not to the debtor.  These credit insurance products include: 

• Life insurance
• Accident and Health/Disability Insurance
• Involuntary Unemployment Insurance

These three types of insurance may be offered singularly or jointly, depending upon applicable state law.

• Credit Property Insurance

Credit property insurance is a fourth form of credit insurance.  However, credit property insurance relates to the collateral, rather than to the debtor(s).  Accordingly, most states permit creditors to require that collateral be insured; and, if the debtor fails to provide his or her own policy of insurance, then the creditor may require credit property insurance to protect the creditor’s collateral and charge the premium to the debtor, without the cost of the same being included in the APR.

Then there are three other common Ancillary Products sold in connection with consumer credit transactions, depending upon state law:

• Non-filing Insurance
• Accidental Death & Dismemberment Insurance
• Motor or Car Club

Non-filing insurance is written to protect the creditor from loss of collateral based upon the creditor’s not perfecting its lien on collateral by filing a UCC-1 Financing Statement or taking possession of collateral.  The charge for non-filing insurance may be passed along to the debtor, and still excluded from the APR.

Accidental Death & Dismemberment Insurance and Motor Club are not payable upon a triggering event to the creditor at all.  Rather payment is made directly to the debtor.  Thus, these Ancillary Products if requested and paid for by the debtor are not credit insurance products.

And, now you know the story of Ancillary Products.