Although many people haven’t heard of these policies, borrowers can get insurance coverage for a personal loan. In the event you get injured, sick, lose your job, or die, the insurer will make loan payments for you.
Personal loan protection insurance is available to borrowers for specific situations that prevent them from repaying their loan. Although costs vary and raise your monthly expenses, loan insurance can help you out in a tight spot, protect your credit, and prevent the financial burden from falling on your family. Read on to learn if loan insurance may be right for you.
What Is Loan Insurance?
Loan protection insurance is coverage borrowers can purchase for various loans — such as personal loans — to guard against situations where the borrower can’t repay the loan. Typically, personal loan insurance covers the borrower when they suffer a disability, injury, job loss, or death. The personal loan protection policy pays a prearranged amount to satisfy the borrower’s balance.
Is Personal Loan Insurance Required?
Personal loan insurance is not mandatory when you obtain a personal loan, and a lender can’t refuse to give you a personal loan because you don’t insure it. However, if you get a secured loan, you may have to insure the collateral you put up. Borrowers with unsecured loans won’t have these concerns, although they will likely have a higher interest rate.
If a lender ever tells you they won’t provide you a loan unless you purchase loan insurance from them, know that you have options. You can report the lender to your state’s attorney general, insurance commissioner, or the Federal Trade Commission.
How Much Is Insurance on a Loan?
You can pay for loan insurance either through a one-time payment or monthly premiums. Your premium will vary based on several factors. First and foremost is the loan balance, with bigger loans incurring higher insurance costs. Paying your premium with an upfront lump sum can decrease the cost.
Your coverage will also determine personal loan insurance costs. For example, you might purchase a $15,000 policy for a $20,000 loan because you have $5,000 in savings. This protection would cost less than a $20,000 policy.
Your location and lender will also influence how much your personal loan insurance costs. Therefore, it’s recommended to shop around for personal loan lenders, just as you would when looking for a new bank or investment firm.
What Are the Benefits of Personal Loan Insurance?
Personal loan insurance helps when you can’t repay your loan. Here are the specific ways a personal loan protection policy benefits you:
Prevent Delinquency or Default
If you suffer a severe injury that prevents you from working, any lost income could result in missed payments. If you have personal loan insurance, it will repay the loan, and you won’t need to worry about delinquent (late) payments or default (failure to repay the loan).
Protect Your Credit Score
Late payments and defaulted loans are reported to the credit bureaus, and that can negatively impact your credit report, causing your credit score to drop. A low credit score can hurt your chances of qualifying for competitive interest rates. You don’t need to worry about late payments and default if you have personal loan insurance, so you can feel confident your credit score won’t be damaged if you’re not able to pay the loan.
Protect Your Dependents and Coborrowers
Similar to life insurance policies, personal loan insurance can help your beneficiaries so your family won’t have to pay off the loan if you cannot. You can purchase a plan that covers coborrowers as well, protecting spouses, loved ones, and business associates from the financial burden.
Recommended: Types of Personal Loans
Types of Loan Insurance
Loan insurance goes beyond personal loans. You can purchase coverage for the following loan types:
Business Loans
Business loans can help small business owners get their companies off the ground or sustain operations. These loans can fund equipment purchases, scaling efforts, or fund payroll. As a result, they are crucial for small businesses in getting established or enduring a market downturn.
Business loan insurance will pay out if the owner or a crucial employee can no longer work. This policy names the lender as the beneficiary and repays the loan on the borrower’s behalf. Business loan insurance can keep a company afloat if it is struggling due to slowed operations and a hefty financial obligation.
Personal Loans
A personal loan is a flexible financial tool that a borrower can use for many purposes. For example, common personal loan uses include repaying high-interest debt or remodel your kitchen.
Personal loan insurance protects the borrower in case they can’t repay the loan due to a serious life event. You may want to consider purchasing insurance for a high-balance personal loan if your dependents and beneficiaries can’t afford to pay it without you.
Recommended: What Is a Personal Loan?
Student Loans
Student loans cover the cost of higher education. Borrowers can take out student loans from either the federal government or private lenders (or both), but these loans have different terms and conditions, and it’s important borrowers know the difference.
Federal student loans are canceled if the borrower dies. Similarly, Direct PLUS loans are canceled if the parent or student dies. As a result, insurance is usually unnecessary for federal student loans.
Private lenders don’t typically discharge student loans when the borrower dies. Instead, they may pursue family members, cosigners, or anyone mentioned in the contract for repayment. Therefore, student loan insurance can be a good investment if you’re concerned about resolving unpaid balances for borrowers who die or become disabled.
Home Loan
A mortgage loan, also called a home loan, is likely your highest debt balance, and the idea of not being able to repay it because of injury, illness, or death is scary. Mortgage protection insurance is for a specific balance your beneficiaries will receive if something happens to you.
For example, if you have $150,000 left on your mortgage, your policy will be for that same amount. If you pass away with $100,000 left, your coverage will pay the balance and transfer the leftover $50,000 to your family.
When applying for mortgage protection insurance, there are fewer health-related questions and standards than for life insurance, so it’s easier to get approved. However, wider accessibility comes with a higher premium cost.
Mortgage protection insurance policies come in all shapes and sizes. You might have coverage solely in the event of your death, or you can limit the payout to your mortgage balance to reduce costs. These policies vary depending on the lender and product type. It’s important to thoroughly understand the policy before committing so you understand exactly what you’re paying for.
Reasons for Getting Loan Protection
Loan protection insurance allows you to safeguard your finances when unexpected crises occur. For example, it ensures that loan repayment won’t be a burden if you’re struggling with illness or unemployment. Similarly, your family won’t have to repay your debts if you die. But it’s important to understand the coverage to determine if it suits your needs.
While loan protection is usually optional, its primary advantage is that it offers borrowers some peace of mind. It allows you to focus on your recovery or job search instead of worrying about meeting loan obligations and maintaining financial stability.
There are other kinds of insurance that are not directly tied to your financial products but can still help pay off debts if you get injured, have a long-term illness, or die.
Disability Insurance
You can also include disability as a condition for your loan insurance. While some policies only cover the borrower’s death, you can add disability to expand your coverage. Doing so means you’ll receive financial relief if you can no longer work due to an illness or injury.
Life Insurance
Your life insurance policy offers a payout if you die. However, it can specifically insure your personal loans and lines of credit if you have high balances. The advantage of the limited coverage is you don’t have to pass a medical examination as you would with a traditional life insurance policy. The drawback is the policy will be more expensive.
Pros and Cons of Loan Protection
Here is a comparison of the pros and cons of loan protection insurance:
| Pros | Cons |
|---|---|
| Offers peace of mind | Increases the cost of the loan |
| Financial relief during hardship | Might accrue interest |
| Protects your credit score | Lenders may deny coverage |
| Avoids delinquency or default on loans | |
| Flexibility for various situations and loan types | |
| Protects dependents | |
| Coverage is optional |
The Takeaway
Loan insurance for a personal loan covers scenarios where you become disabled, unemployed, or deceased. This coverage allows you to maintain strong credit instead of missing payments. In addition, it protects your loved ones from unexpected debt. As a result, purchasing insurance when taking out a personal loan can grant peace of mind and help you focus on what matters most.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
What is loan insurance?
Loan insurance is a policy from a lender providing a payout to cover your loan if you can’t repay it. You can purchase coverage for situations where you become disabled, lose your income, or die.
How much is insurance on a loan?
The cost of a loan insurance premium depends on multiple factors, such as the loan size, the lender, your location, and if you pay the premium in one shot. In addition, your insurance may have an interest rate, increasing its cost.
What is the benefit of personal loan insurance?
The advantage of personal loan insurance is that your loan will be repaid even if you lose your income or die. As a result, you don’t have to worry about a situation where your loved ones must dig their way out from under your debt. In addition, you’ll preserve your credit score because you won’t fall behind or default on the loan.
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