When you take out a loan, you likely have every intention of repaying it in full. But what if something such as a job loss, an illness, or an injury keeps you from fulfilling your obligation? That’s where loan protection insurance comes in.
Loan protection insurance, also known as credit insurance, is a type of insurance policy designed to cover a borrower’s loan payments if they become unable to make them due to an unforeseen circumstance.
This type of coverage can provide peace of mind — and help protect your credit — in the event of the unexpected. But ​​it comes at a cost, and in some cases, it may not be necessary.
Read on for a closer look at loan protection insurance, including what it is, how it works, what may be excluded from coverage, and whether it’s worth buying.
Table of Contents
- Loan Protection Insurance Definition
- How Does Loan Protection Insurance Work on Personal Loans?
- What Does Loan Protection Insurance Cost?
- What Are the Benefits of Loan Protection Insurance?
- Risks of Having Loan Protection
- Common Reasons for Being Refused Loan Protection
- Is Loan Protection Insurance Required?
- FAQ
Key Points
• Loan protection insurance, also known as credit insurance, helps cover loan payments if the borrower cannot make them due to unforeseen circumstances such as job loss, illness, injury, or death.
• The insurance typically covers payments for a set period (usually 12 to 24 months) and pays the lender directly rather than the borrower.
• Premiums for loan protection insurance can range from 1% to 5% of the monthly loan payment, with costs varying based on coverage amount, policy length, borrower age, and location.
• While loan protection insurance can provide peace of mind and protect your credit score, it may not always be necessary, especially if other insurance types (such as life or disability insurance) offer better coverage at a lower cost.
• Borrowers should carefully evaluate the policy’s coverage limitations and consider alternatives such as traditional insurance policies or emergency savings to avoid unnecessary costs.
Loan Protection Insurance Definition
Loan protection insurance is an insurance product that lenders sometimes offer borrowers with certain types of loans, including personal loans. Typically, the insurer will make the loan payments for a set period of time (or up to a predetermined amount) if the policyholder can’t keep up with the obligation because of a covered event.
For example, let’s say you take out a personal loan and opt to purchase credit insurance. If at some point during your repayment term, you lose your job, get into a car accident, or become hospitalized with a serious illness, the insurance can help ensure your debts are paid.
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How Does Loan Protection Insurance Work on Personal Loans?
Personal loan protection insurance is designed to help prevent a borrower from defaulting on a personal loan in the event of financial hardship. If a covered event occurs, the insurer agrees to step in and make payments on the loan for a set period of time, typically between 12 and 24 months.
Events that are often covered by personal loan insurance include:
• Job loss
• Sickness
• Accidents
• Death
What makes credit insurance different from other types of insurance policies is that the payments go to the lender, not the policyholder. Though you’re the one paying the premiums for credit insurance, the payout goes directly to your lender.
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What Does Loan Protection Insurance Cost?
The cost of loan protection insurance varies widely depending on the insurer, the coverage amount, the length of coverage, your age, the state you live in, and other factors. Typically, the cost is calculated as a percentage of the monthly loan payment, ranging from 1% to 5%. As a result, the larger the loan balance, the more it costs to insure it.
If you’re considering loan protection insurance, you may want to compare the cost of the policy to other types of insurance — such as life insurance, disability insurance, or accident insurance — especially if these types of coverage are offered for free or at a subsidized rate through your employer.
One way you may be able to reduce the cost of loan protection insurance is to pay the premium in a single payment instead of rolling it into your monthly loan payments. Some credit insurers will offer a sizable discount if you’re willing to pay the full cost of the insurance up front.
What Are the Benefits of Loan Protection Insurance?
Loan protection insurance isn’t necessarily the right fit for everyone, but it does offer some advantages (especially if the policy is reasonably priced). Here are some benefits to consider.
Credit Score
If an unexpected hardship occurs and you’re unable to make your loan payments, loan protection insurance could kick in and prevent you from missing payments or defaulting on the loan — and taking a hit to your credit.
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Save Money
Maintaining a strong credit profile can pay off down the line by helping you qualify for loans with lower rates and better terms. This can help you save money and make the cost of the credit insurance worthwhile. Future employers and landlords may also look at your credit when making decisions.
Peace of Mind
Having credit insurance can take some of the pressure off of loan repayment and provide the comfort of knowing that, if something happens that makes you unable to pay your debt, you’ll be protected.
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Risks of Having Loan Protection
One downside to loan protection insurance is that you might end up paying for something you never use. Here are some other drawbacks to consider.
Cost
Loan protection insurance can be expensive compared to stand-alone disability and life insurance policies. It’s worth assessing what type of coverage you already have and comparing the cost of loan insurance to other types of coverage, such as supplemental disability or life insurance.
Coverage Limitations
There may be limitations on coverage, which could decrease the policy’s usefulness. For example, in some cases, a loan protection policy won’t cover a pre-existing illness or won’t kick in if you take on a part-time job or any freelance work after losing your job.
May Not Be Necessary
If your main concern is protecting your family from being liable for your debt should you become unable to pay, know that most loans that are only in your name (and don’t have a guarantor or cosigner) cannot require your family to make your loan payment if you’re unable to. If you’re not worried about loan default (and potentially losing your assets to creditors), loan protection insurance may not be worth it.
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Common Reasons for Being Refused Loan Protection
Because there are different types of loan protection insurance and policies can differ from one company to the next, it’s important to review the reasons your policy might not pay out when you make a claim. Here’s a look at some common reasons why claims can be refused.
Part-Time Employment
If you lose your job but take on part-time work to make ends meet, a credit insurance policy may not kick in, and you’ll still need to cover your loan payments.
Pre-Existing Medical Conditions
If you are unable to work because of an illness, an injury, or another condition that existed before you purchased the policy, your claim could be refused. It’s important to understand which health conditions may not be covered under the policy before you sign up.
Short-Term Employment
If you lose your job because it was a short-term employment contract, you likely won’t qualify for a credit insurance payout, since the work was expected to end at that time.
Self-Employment
Self-employed workers might be able to make a claim if they become sick or disabled, but not if they lose the work that provides their income.
Being Able to Work Another Type of Job
If you lose your income due to an inability to continue your current job (say, due to an injury), but you are able to work another type of job, a loan protection policy may not pick up your loan payments.
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Is Loan Protection Insurance Required?
Loan protection insurance is optional. It’s illegal for a lender to force you to buy the policy in exchange for approving your loan. If you’re securing your personal loan with collateral (such as a car or some other asset), you may be required to insure that property, but you don’t have to insure it through the lender’s policy.
If you believe that your lender incorrectly told you that you wouldn’t be approved unless you purchased loan protection insurance, you can submit a complaint to your state attorney general, state insurance commissioner, or the Federal Trade Commission.
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The Takeaway
Loan protection insurance offers borrowers a way to continue making their loan payments and protect their credit scores in the event of an unexpected financial hardship. These policies are available for different types of lending products, including auto loans, mortgages, personal loans, and credit cards.
However, this protection comes at a cost, and some hardships are excluded from coverage. In many cases, short-term or long-term disability insurance policies may offer more cost-effective protection for a loss of income. So be sure to do your research and read the fine print on all costs and exclusions before you agree to loan protection insurance.
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FAQ
Can you get protection on a personal loan?
Yes. Loan protection insurance is available for several types of loans, including personal loans. Some lenders also offer hardship assistance programs for borrowers who run into trouble making payments due to unexpected circumstances.
What is loan protection insurance?
Loan protection insurance is a type of insurance designed to help protect you from defaulting on a loan due to an emergency, loss of income, or unexpected change in circumstances. If a covered event (such as a job loss, an accident, or an illness) occurs, the insurance would make payments on the loan for a predetermined period of time.
Why should you get personal loan protection insurance?
Personal loan protection insurance can provide peace of mind that, if you run into financial difficulty, you won’t default on your loan. Avoiding a loan default can help prevent negative financial consequences and damage to your credit. However, these policies can be costly and typically include several exclusions. Other types of insurance, such as disability or accident insurance, may be more cost-effective.
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