There’s always the concern that something could happen to keep you from following through on your obligations — despite your best intentions — whether it’s an involuntary job loss, illness, injury, or even death.
That’s why some lenders offer loan protection insurance, an insurance policy that’s designed to cover a borrower’s loan payments if they are unable to keep up with the commitment.
If your lender is making this optional coverage available for your personal loan, you may be wondering if it’s right for you. In this guide, we’ll go over some general details you should know about loan protection insurance and provide questions you can ask about the specific policy your lender may be offering.
Loan Protection Insurance Definition
Loan protection insurance is an insurance product that lenders sometimes offer borrowers with certain types of loans, including personal loans. The insurance makes the loan payments — up to a predetermined amount — if a policyholder can’t keep up with the obligation because of a covered event.
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How Does Loan Protection Insurance Work on Personal Loans?
When you buy insurance, your premiums pay for protection against a potential financial loss. Loan protection insurance is specifically designed to keep a policyholder from defaulting on a covered personal loan when an unexpected life event occurs. The insurer agrees to step in and make payments if the borrower makes a legitimate claim.
What Does Loan Protection Insurance Cost?
The cost of loan protection insurance could vary significantly depending on the type of policy you buy, how much coverage you choose, the state you live in, who you get coverage through, and other factors. Generally, the larger the loan balance is, 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 supplemental insurance — especially if these types of coverage are offered for free or at a subsidized rate through your employer.
One way to reduce your costs, if the option is available, may be to pay the loan insurance premium in a single payment. The alternative choice, to roll the cost of your premiums into your monthly loan payments, may seem more affordable or convenient at the time you take out your loan. But with the latter option, your coverage could end up costing you even more, because you’d be paying interest every month on both your loan and the insurance premium.
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:
Paying for loan insurance might be worth it if an unexpected hardship occurs and it helps you protect your credit score. A good credit score can play a big part in reaching your future goals — both financial and otherwise. It can make it easier to access credit at a competitive interest rate. And future employers, landlords, lenders, and others may make decisions about you based on your good or bad credit score.
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No Missed Payments
If an illness, job loss, or some other calamity is threatening your finances, knowing your loan protection insurance is making the monthly payments on your covered loan could help minimize the stress. Instead of worrying about falling behind, you may be able to put more of your focus on taking care of yourself and your family.
Risks of Having Loan Protection
One big downside to loan protection insurance is that you might end up paying for something you never use. Here are some other drawbacks to consider:
Loan protection insurance can be expensive — especially if the lender rolls the cost into your loan payment and you have to pay interest on the insurance every month along with the amount you borrowed. If you’re already worried about affording your monthly loan payment, adding insurance could make it even more challenging.
Though it lowers the lender’s risk that you might default on your loan, buying loan protection insurance won’t necessarily lower the personal loan interest rate you pay. If a lender tells you it will, you can ask for a breakdown of the loan’s costs with and without insurance to be sure you’re getting the full picture. Remember, the lender may be charging interest on both the monthly insurance premium and the loan amount, and that can make your loan more expensive.
Common Reasons for Being Refused Loan Protection
Because there are different types of loan protection insurance, and policies can differ from one lender to the next, it’s important to review the reasons your policy might not pay out when you make a claim. Some common reasons claims can be refused include:
A policy may require that the holder be employed for a certain number of hours per week — typically at least 16 hours – to qualify for a payout.
Pre-existing Medical Conditions
If you are unable to work because of an illness, injury, or other condition that existed before you purchased the policy, your claim could be refused. It’s important to be clear about which health conditions might not be covered under the policy — and to be upfront about any health issues you know you have when you sign up.
If you are employed under a short-term contract, you likely won’t qualify for a payout if that employment ends.
Some policies may exclude self-employed individuals altogether, or a policy may place restrictions on certain types of payouts. Self-employed workers might be able to make a claim if they become sick or disabled, for example, but not if they lose the work that provides their income.
Can Only Work Your Current Job
If you are unable to work any job other than the one you hold currently, your claim might be declined.
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 (a car or some other asset), you may be required to ensure that property, but you don’t have to insure it through the personal loan lender’s policy.
If you feel you were incorrectly told by a lender that because of the purpose of a loan 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.
Loan protection insurance offers borrowers a way to continue making their personal loan payments and protect their credit scores when an unexpected financial hardship occurs. But it can be expensive, and it isn’t necessarily a good fit for everyone.
You may find there are other strategies that make more sense for your individual situation. Some lenders may offer assistance programs for borrowers who are having trouble making their payments. Other alternatives that may cost less than loan protection policies are life insurance or disability insurance policies.
There are no late fees charged on SoFi Personal Loans. And SoFi Customer Support is available to answer your questions and try to get you the help you need.
Can you get protection on a personal loan?
Yes. Loan protection insurance is available for several different kinds of loans, including personal loans. Some lenders may offer their own assistance programs for borrowers who are having trouble making payments.
What is loan protection insurance?
Loan protection insurance is an insurance product offered by lenders for certain types of loans. The insurance may make payments on a covered loan — up to a predetermined amount — if a policyholder can’t keep up with their loan obligation because of a covered event.
Why should you get personal loan protection insurance?
If you’re concerned about making your payments should a financial hardship occur, and you want to protect your credit score, personal loan insurance can be an option worth considering. A lender can’t require that you enroll in the policy it offers. And there may be other payment protection strategies that make equal or more sense for you.
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