What Is Credit Insurance on a Personal Loan?
Table of Contents
- By Greg Brown
- Feb 27, 2023
The idea of insuring loans against non-payment was first developed in the nineteenth century. However, the companies that wrote these policies were short-lived. The main foundations of the modern industry were laid in the first world war, with the British government playing a significant role. After 1945 credit insurance became increasingly popular in Britain and the States.
Over time banks and insurers began to develop the product to offer protection against the rise of defaulting debtors. Today’s credit risk market is a comprehensive industry controlling business and personal loans via credit monitoring.
Personal Loan Credit Insurance
Personal loan protection policies are designed to pay off a loan if the policyholder can not pay due to unforeseen circumstances. Policies are designed to make the monthly payment or pay off the entire balance. Policies offer short-term protection with coverages ranging from 12 to 24 months.
Vehicle Loan Property Protection Insurance
Property protection on automobiles, trucks, motorcycles, and recreational vehicles has become extremely popular. In times of financial crisis, policyholders have help to continue making payments on their vehicle. Depending on the buyer’s credit, lenders may require a loan protection policy to finalize the funding.
Make sure you understand all the terms, conditions, and exclusions before signing any documents. Vehicle loan protection policies differ, and some circumstances must be considered.
- Your job is part-time
- Cannot be employed at any other position than the current job
- Pre-existing medical conditions
- You are working with a short-term contract
There is a variety of insurance policies that can be obtained to protect a personal loan. Depending on the coverage and company, policies may cover payments and outstanding balances on personal loans.
Credit Insurance on Personal Loans
Credit Disability Insurance, also known as accident and health insurance. If you become ill and cannot work, the insurance company makes payments on your loan under the terms set out at the start of the policy. This is optional insurance and can be added to the loan balance. Some carriers may combine credit life and credit disability into one policy, and there may be cancellation provisions. You should always ask yourself if you can benefit from having insurance on a personal loan.
It is possible to add Credit Disability after the loan closes.
Credit Unemployment Insurance can also be called Credit Involuntary Unemployment Insurance. This policy covers a personal loan if the holder is involuntarily laid off. There are no age restrictions, and the worker must qualify for the state’s unemployment benefits. There are a few additional stipulations workers must qualify for before the policy can go into effect.
- Must be employed for a minimum of 30 hours a week
- Coverage is only available in conjunction with a personal loan by the worker
- Self-employed workers are not eligible in most states
- No age restrictions
Credit Life Insurance pays off the existing loan balance if the policyholder dies unexpectedly. The policy may cover the co-borrower as well. A single premium pays for the insurance. There are no monthly or annual payments to be concerned with. The premium is included in the loan and can never increase or lapse during the term of the loan. Qualifications for this policy include:
- The maximum enrollment age is 64
- No medical exam is required. Coverage is determined by age and the answers on the enrollment form
- The policy is only available in conjunction with a loan
- Single and Joint policies are available
Benefits of Credit Insurance
Consumers cannot be forced to purchase credit insurance for a personal loan. However, lenders urge the borrower to purchase credit insurance for every vehicle sold or unsecured installment loan closed. There is a distinct difference between credit loan protection and life insurance or disability insurance. Credit loan protection does not pay the borrower anything. The insurance only ensures the lender is paid.
Banks and Financial Institutions
For banks and lenders of personal loans, credit insurance offers long-term benefits. Risk is transferred from the bank’s balance sheet to the credit insurers’ books, improving the lender’s bottom line. Bad debt is covered by the lender, giving them more working capital. One of the most significant advantages for banks and consumers is that credit insurance lets lenders offer better terms to their clients, giving the bank a competitive advantage.
Not only does credit insurance indemnify bad debts, it also improves the banks’ relationship with their clients. Well-managed credit risk improves the credit rating of banks and financial institutions that loan money. This improvement puts them in a better negotiating position with suppliers and other financial institutions.
One of the biggest advantages banks enjoy when offering consumer credit insurance is improved cash flow. Rather than an erratic and unpredictable flow of money, consumer credit insurance provides predictability, making them more competitive.
Do I Need Credit Insurance
As stated earlier, consumers cannot be forced to purchase credit insurance on an automobile or personal loan. However, the lender may pressure on the borrower to cover the loan. Unethical lenders may pull the loan or raise rates if credit insurance is not purchased.
Credit insurance is also called payment protection, and debt cancellation addendums work similarly. Gap waivers are extremely popular in the automotive industry. Gap addendums are usually added to the auto loan or lease to make sure everyone is covered in the event of an accident.
Gap waivers are debt cancellation agreements that absolve you from paying the difference between what you owe and what the vehicle is worth if declared a total loss or theft. Gap waivers are an alternative to comprehensive collision insurance. Debt cancellation policies are based on the amount financed and not the customer’s credit score. Debt cancellation is not insurance, and customers still need liability coverage.
Payment protection insurance is worth considering if you feel that sometime in the future, an event may keep you from making payments. This forethought is good for any consumer if they believe their job may be in jeopardy. However, payment protection may not be necessary if you have the resources and savings to weather a downturn.