Debt Protection/Credit Insurance

Unlike insurance, which pays a claim to a beneficiary, debt cancellation products either suspend payments on a loan or cancel a debt altogether. Debt cancellation is designed to provide financial protection against certain life events that may affect a borrower’s ability to repay a loan.

Those events can include:

• Death • Disability • Involuntary unemployment • Divorce • Marriage • Family Medical Leave

• Hospitalization • Call to active military duty

The contract can be setup to offer full cancellation of a loan, partial

cancellation, payment suspension or a payment holiday.

How are the payments set up for debt cancellation?

Debt cancellation payments are typically set up to be paid based on the

Closed End Monthly Outstanding Balance (CEMOB) of the loan being

protected. CEMOB provides banks with credit life and disability insurance

alternatives to help banks in the home equity lending market meet the

restrictions of the HOEPA Act of 1994. With CEMOB, the borrower pays

a portion of the insurance premium each month. The amount paid each

month is dependent upon the balance of the loan at that time. Therefore,

the total payment the borrower pays each month to a financial institution

is comprised of the credit insurance premium, interest charge and principal

amount. To compute a CEMOB payment, a simple interest loan payment

including CEMOB insurance is calculated with the addition of the credit

insurance premium. Each month, the financial institution calculates the

credit insurance premium due for the month then the interest due for the

month. After reducing the payment by the total of the premium and interest

charges, the remainder is applied to reduce the principal balance.