6.3 Special Insurance Topics in Michigan

Credit Life and Credit Disability Insurance

Credit insurance repays or covers a debt if the borrower dies (credit life) or becomes disabled (credit disability/credit accident & health). The creditor is the beneficiary, and coverage decreases as the loan balance falls.

Consumer Protections (heavily tested)

• It must be disclosed as optional — a lender cannot require credit insurance as a condition of granting the loan.
• Coverage cannot exceed the amount of the debt (no over-insurance/profit motive).
• If the loan is paid off early, the borrower is owed a refund of unearned premium.

Exam trap: A loan officer who tells a borrower "you must buy our credit life to get the auto loan" has violated the optional-disclosure rule. The correct consumer answer is that the coverage is voluntary and the loan cannot be conditioned on it.

Accelerated Death Benefits (ADB)

An accelerated death benefit lets a living insured collect part of the policy's face amount early when a qualifying condition strikes, helping pay medical or living costs.

Worked example: An insured with a $200,000 policy and a terminal diagnosis accelerates $100,000. At death the beneficiary receives the remaining $100,000 (less any accrued charge). ADB is a living benefit — distinguish it from a viatical settlement, where the policy is sold to a third party rather than paid early by the insurer.

Viatical Settlements (Michigan Act 386 of 1996)

A viatical settlement lets a terminally or chronically ill policyowner (the viator) sell an existing life policy to a third party for an immediate cash sum that is less than the death benefit. The buyer (provider/investor) becomes owner and beneficiary and pays the remaining premiums, collecting the full face amount when the insured dies.

Michigan regulates these under the Viatical Settlement Act, Act 386 of 1996, administered by DIFS (Department of Insurance and Financial Services).

Exam contrast: Accelerated death benefit = insurer advances part of the same policy. Viatical settlement = the policy is sold to an outside buyer. Both put cash in the hands of a sick insured, but only the viatical transfers ownership.

Genetic Discrimination Prohibition

Michigan bars insurers from using genetics to discriminate.

The federal Genetic Information Nondiscrimination Act (GINA) adds protections, primarily for health insurance and employment, barring use of genetic information including family medical history.

STOLI Prohibition

Stranger-Originated Life Insurance (STOLI) is an arrangement where an investor with no insurable interest induces someone to take out a policy intended from the start to be transferred to that investor.

Why Michigan Prohibits STOLI

• It violates the insurable-interest requirement — at issue, the owner must have a legitimate interest in the insured's continued life.
• It creates a moral hazard: a stranger profits from the insured's death.
• It turns life insurance into a speculative wager against public policy and may involve fraud or misrepresentation on the application.

Key distinction: Selling an existing, legitimately owned policy (a viatical or life settlement) is legal and regulated. STOLI is illegal because the policy was manufactured for a stranger-investor who never had insurable interest. The timing and intent at issuance are what separate a lawful settlement from prohibited STOLI.

Putting the Special Topics Together

These topics share one thread: protecting against profit from another's misfortune or lack of legitimate interest. Use this quick map to keep them straight on the exam.

When a scenario describes a sick insured needing cash, decide whether the insurer advances the benefit (accelerated death benefit) or a third party buys the policy (viatical). When a scenario describes an investor or a debt, route to STOLI or credit insurance respectively. This decision tree resolves the majority of Chapter 6 special-topics questions without further analysis.