The promise of insurance helps families access cheaper funds and cope better
The Microinsurance Learning and Knowledge (MILK) project partnered with Compartamos Banco, the largest MFI in Mexico, to explore how life microinsurance can help families cope with the death of a borrower. For all group-lending borrowers, Compartamos insures the outstanding loan balance when a borrower dies and provides a cash payment of US$ 1,160 to beneficiaries to cope with funeral costs and lost income. Borrowers have the option to purchase a higher cash payment benefit in increments of $1,160.
The MILK project interviewed insured and uninsured families to understand the costs they incurred and how they coped when a relative died. MILK found that both groups relied heavily on debt to finance the funeral, as most funeral costs were incurred before the beneficiaries received the insurance payout. Among the insured group, the debt was largely informal. In contrast, uninsured families turned to high-interest bank loans. Uninsured families also relied more often on stressful coping mechanisms, such as using savings and selling large assets such as vehicles, land plots, or animals.
MILK’s ‘client math’ research methodology is not randomized and thus not designed to assess the differential impact of microinsurance on insured vs. uninsured families. Nonetheless, the similar socio-economic profile of the two groups (average monthly household income was $506 for insured and $323 for uninsured households) allows for comparability and inference of insurance’s role in coping with a relative’s death. The difference in the funeral financing strategies between the groups suggests that the insured had greater access to loans from informal sources because friends and families knew that the insurance payout would allow a quick and total repayment; the benefit essentially acted as collateral for the informal loans. Insured families could spend slightly more on the funeral ($1,583 vs. $1,547) while financing slightly less (see graph), and had an additional sum available after the insurance payout to help them adapt to the loss of a breadwinner, since 63 per cent of them had opted to purchase additional coverage.
For more detailed results, see MILK Brief #16: “Doing the Math” - Life Microinsurance in Mexico. The Brief provides a full picture of who the insured and uninsured are, and how they financed funerals.