What Is Credit Insurance on a Personal Loan?

  • By Greg Brown
  • Feb 27, 2023

credit insurance on a personal loan

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
  • Self-employed
  • 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. 

benefits of credit insurance

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.

Final Word

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.

About the Author
IDStrong Logo

Related Articles

How to Build Credit From Scratch in 3 Fast Ways

If you have never had a credit card, loan, or mortgage, you may not have any credit. Or you may ha ... Read More

Top 9 Tips to Improve Your Credit Score

Unfortunately, in life, it is critical to have a good credit score to qualify for a mortgage, appl ... Read More

Explaining Bankruptcy and How Long it Stays on Your Credit Report

No one wants to go bankrupt, but when you get in over your head and can’t see a way out, som ... Read More

What is Credit Fraud Monitoring?

Good credit is an important thing in life. You can’t apply for credit cards, loans, or a mor ... Read More

How to Freeze Your Credit

With data breaches, ransomware, and identity theft on the rise, consumers must put in an extra eff ... Read More

Latest Articles

Family Dollar & Dollar Tree Bleed Consumer Data Following Cyberattack

Family Dollar & Dollar Tree Bleed Consumer Data Following Cyberattack

In 2015, Family Dollar acquired its biggest competitor, Dollar Tree. Family Dollar is one-half of a consumer's dream; they offer low-priced goods for families in 8,200 locations nationwide.

Weekly Cybersecurity Recap December 1

Weekly Cybersecurity Recap December 1

This week, cybercriminals targeted health lifestyle members, patients, gamblers, and general consumers. Early on, Welltok returned to the news, this time with over 426k member data stolen by assailants; the organizations impacted by the breach were Premier Health and Graphic Packaging International.

Caesars Entertainment Breach Update, Millions of Gambler Records Compromised

Caesars Entertainment Breach Update, Millions of Gambler Records Compromised

Caesars Entertainment (CE) oversees 58 gaming properties across the continental states. Their locations include world destinations, nightlife activities, a comprehensive concierge, and an industry-leading approach to draw millions of gamblers weekly.

Featured Articles

How to Buy a House with Bad Credit

How to Buy a House with Bad Credit

Buying your own home is the American Dream, but it might seem out of reach to those with bad credit. However, the good news is, if your credit is less than perfect, you do still have options and in most cases, can still buy a home.

How Secure Is Your Password? Tips to Improve Your Password Security

How Secure Is Your Password? Tips to Improve Your Password Security

Any good IT article on computers and network security will address the importance of strong, secure passwords. However, the challenge of good passwords is that most people have a hard time remembering them, so they use simple or obvious ones that pose a security risk.

Top 10 Senior Scams and How to Prevent Them

Top 10 Senior Scams and How to Prevent Them

Senior scams are becoming a major epidemic for two reasons. First, seniors often have a lot of money in the bank from a life of working hard and saving.

Free Identity Threat Scan
Instantly Check if Your Personal Information is Exposed
All fields below are required
Please enter first name
Please enter last name
Please enter a city
Please select a state
Please enter an age
Please enter an email address