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What is personal loans credit insurance
Most loan protection insurance policies cover certain events for a short-term period, relieving you from having to make payments for a set period, usually between 12 and 24 months. According to the Federal Trade Commission, there are four types of loan protection insurance, each of which covers different situations. : If you pass away before repaying all of your loans, this policy pays off either some or all of your remaining balance. Credit disability insurance: This is sometimes referred to as accident and health insurance, which gives you temporary relief from making payments if you can’t work for health reasons. Involuntary unemployment insurance: If you get laid off or lose your job, this policy can cover your loan payments for a while. Credit property insurance: When you use personal property as loan collateral, this insurance protects the property itself rather than your loan payments. Who needs credit insurance
Individuals who want to ensure that payments toward a credit account remain in good standing, in the event of disability or death, might benefit from credit insurance. For example, a situation when this might come up is for a mortgage on a primary family residence. In most cases, however, personal loan insurance isn’t worth it. The extra costs can make your loan more expensive and put you at risk of default. Also, if you have life or disability insurance, it’s likely more affordable than investing in credit insurance. Sometimes, however, personal loan insurance may make sense. If you have a loan that you can’t defer, for example, or you’re concerned about debt due to a medical condition, job loss, or death, it can be an option. Cost of credit insurance
Credit insurance is almost always more expensive than other types of insurance such as term life insurance. The amount you’ll pay will depend on factors like loan or credit type, the amount of debt that will be protected and the type of insurance policy and lender you choose. The US Government Accountability Office found that debt protection insurance fees ranged from for debt insurance for credit cards. Although it doesn’t look like much, the cost adds up for high-balance loan amounts. According to Wisconsin’s Department of Financial Institutions, the credit life insurance premium on a $15,000 car loan with a four-year term at 9% . For credit disability insurance, the cost can climb higher. It found that alternative protections, like term life insurance have a lower premium than getting a credit insurance policy upon signing for a loan. Whether or not your loan or credit is open like a credit card or closed like an installment loan can also play a role in the cost of credit insurance. Pros and cons of loan protection
While there are some benefits associated with loan insurance, there are also drawbacks to consider when deciding whether it is the right financial move for you. Pros Cons Protects your credit score from the impacts of late payments or defaults. There may be limitations on how helpful the policy will actually be. Saves you money on increased interest rates that result from a default or late payments on your credit profile. Loan insurance increases the overall cost of your loan. Factors to consider
Before you take the plunge and move forward with personal loans insurance, think about these factors: Your budget: Because loan insurance can increase the overall cost of your loan, look at your budget. Based on your personal loan’s principal balance, calculate how much cost the optional credit insurance will add. Compare this amount against your monthly budget to make sure you can afford it. Your reason for wanting it: Other types of insurance policies you have: Various offers: Personal loan insurance varies from company to company. If you ultimately believe that credit insurance is right for you, research and compare the premium rates and terms of different lenders. The fine print: Read the fine print of any policies you’re considering so that you know what to expect as you make payments toward your credit insurance coverage. Also, find out what will happen in the event you default on your loan. Next steps
Personal loan insurance isn’t an automatic scam, but there may be limitations to how helpful it actually is. At the end of the day, you need to perform a cost-benefit analysis to make sure the extra policy expense is worth the coverage you receive. Rather than glossing over your plan, pay attention to the details on exclusions and the claims process to maximize your personal loan insurance when you really need it. SHARE: Heather Larson Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. Related Articles