When you apply for a personal loan, your lender might offer you a loan insurance add-on. Since investing in insurance can be expensive, it’s important to assess whether loan insurance makes sense for you.
Here’s what you should know about the various benefits that can come with personal loan insurance.
One of the main reasons borrowers purchase personal loan insurance is to secure death benefits. In case of untimely death, the insurance policy’s death benefits can help protect the financial needs of the policyholder’s loved ones.
Death benefits may include:
- Paying off outstanding debt (either some or all) to the lender
- The borrower’s estate will be relieved of the debt obligation
- Surviving family members are relieved of the debt obligation
For this kind of insurance coverage, it is advisable to carefully go over policy terms and exclusions. There are often special requirements for cases of pre-existing medical conditions or suicide.
One common requirement related to death benefits is that the waiting period for the policy has passed. This means that coverage won’t be active after a certain length of time has passed after buying the policy.
Credit life insurance
If you opt for credit life insurance, which is similar to personal loan insurance, the policy should cover your outstanding loan balance in case of death. The death benefits that get rid of debt obligations for any surviving responsible parties are the primary focus of credit life insurance.
Compared to credit life insurance, personal loan insurance offers broader coverage. It is up to you to weigh which option is more favorable in your particular circumstances.
If you become disabled and are no longer able to work, personal loan insurance’s disability benefits may be able to provide you with financial assistance. Depending on your lender and loan agreement, the exact definition of “disability” can vary.
In general, disability benefits are granted if you are kept from work due to a serious injury or illness. To confirm you can receive disability benefits, you may need:
- Medical assessments by a trained physician
- Consultations with healthcare professionals designated by your insurer
- A certificate of disability with an official diagnosis of your illness
If you buy personal loan disability insurance, there is typically a waiting period called the elimination period before you can receive disability benefits.
If you lose your job, you can become eligible for your personal loan insurance’s unemployment benefits. Unemployment may be due to:
- Company layoffs
- Business closures
- Unionized labor disputes
- General strikes
- Employee lockout
- Other involuntary job termination
If you successfully receive unemployment benefits, it means that you can receive an insurance payout that helps you meet your monthly loan obligations for a specified period of time. This coverage may last either for a few months or until you find a new place of employment.
Eligibility requirements for unemployment benefits
To gain unemployment benefits from insurance, you usually need to be employed full-time when you buy the insurance product. There is also an elimination period after you purchase insurance that acts as a waiting period. If you become unemployed during this time, you won’t receive any benefits until after this period is over. The elimination period may last a few days or weeks, and you can find details about it on your insurance policy.
To qualify for unemployment benefits, there is also typically an additional list of requirements you need to meet. For example:
- You need to be actively seeking a new job
- You need to be registered with an official unemployment status
Personal loan insurance may be able to provide coverage for your loan repayment needs in case there is an unexpected accident. The insurance payout may help you cover medical expenses, medication costs, rehabilitation, and ongoing treatment after the accident. Depending on your insurance policy, lost wages may also be covered.
Example accidents that are commonly covered include:
- Slip and fall
- Car collision
- Sport accident
- Loss of limb
However, there are accidents that are excluded from accident benefits. If the accident occurred due to a high-risk or illegal activity the policyholder willingly engaged in, coverage may be withdrawn. Commonly excluded accidents include:
- Extreme sports
- Injuries caused by participation in illegal acts
- Self-inflicted harm
Depending on the nature of the injury, there may also be overlap with disability benefits.
If you become hospitalized due to a covered injury or illness, your insurance policy’s hospitalization benefits may help you cover related expenses. The personal loan insurance policy will outline the coverage limits and restrictions, as medical expenses can be quite expensive.
What do hospitalization benefits cover?
Personal loan insurance typically covers only a percentage of your medical expenses while you are unexpectedly hospitalized. The exact portion depends on your policy, and there can be various limitations and excluded cases.
Covered expenses may include:
- Nursing care and doctor’s fees
- Room charges for hospitalization
- Intensive care unit (ICU) fees
- Surgery and anesthesia costs
- Diagnostic tests
- Follow-up visits
It’s important to note that there is usually a max duration after which your insurance will no longer cover your hospitalization expenses.
Critical illness benefits
Critical illness benefits are similar to hospitalization benefits in that they are related to medical expenses. You can use the insurance payout for medical needs such as ongoing treatment costs, medical bills, rehabilitation expenses, lifestyle adjustments, and more.
For this kind of claim, insurance may cover situations such as:
- Heart attack
- Renal failure
- Major organ transplant
- Bone marrow transplant
- Coronary artery bypass surgery
If you become diagnosed with a covered critical illness, what insurance typically does is grant you a lump sum payment of a predetermined amount that was specified in your policy.
Personal loan insurance policies usually have a waiting period before critical illness benefits become payable. This may mean that the policyholder must survive this waiting period after the initial diagnosis of the critical illness. It’s important to also carefully review your policy terms and conditions to see if there are special requirements and exclusions.
For individuals who have taken out personal loans and are concerned about their health insurance coverage, it might be worth looking into alternative options. A personal loan insurance policy might not provide as comprehensive coverage for healthcare needs as a healthcare-focused policy.
Property damage benefits
Property damage benefits help cover expenses related to your personal property being damaged. If you are eligible for property damage benefits with your personal loan insurance, you’ll be able to file a claim for property damage and receive financial compensation.
Covered events commonly include the following perils:
- Fire damage
- Natural disasters
- Unforeseen accidents
Note that for personal loan insurance, property damage coverage and collateral protection are not the same.
Collateral protection: Specifically protects property you have put up as collateral assets for a secured personal loan–this is more in the lender’s interest.
Property damage coverage: Benefits the borrower more since it is meant to cover the borrower’s personal property.
Loan balance coverage
Personal loan insurance policies can offer loan balance coverage, which is also called loan balance protection. If unforeseen circumstances stop you from being able to pay off your loan, loan balance coverage can kick in and provide financial assistance.
Depending on your policy terms, loan balance protection will either cover a portion of your outstanding balance or the entire remaining loan balance. This effect can activate in the case of covered events, which commonly include:
- Serious accidents
Before buying loan insurance with loan balance coverage, it is important to consider the premium cost as well as what situations are excluded from coverage.
Premium payment options
There are usually numerous ways you can choose to pay your personal loan insurance premium. Here are some of the common payment methods.
Lump sum payment: This option allows you to pay for the entire insurance coverage upfront in a single payment at the start of your policy term. This can be convenient since it won’t disrupt how much you need to budget for your monthly loan payments in the future.
Fixed monthly premium: Your total premium will be divided into smaller, equal monthly installments that you can pay alongside your usual personal loan payments. Some borrowers prefer this method since you won’t have to pay as much at the start of the policy term.
Payments separate from your loan repayment schedule: If you find budgeting for your insurance premium and monthly loan payments on the same day each month frustrating, you can choose this option. This allows you to create a new payment schedule for your insurance premium, separate from your loan repayment schedule.
When your lender offers you a personal loan insurance add-on, you can ask questions to better understand what coverage is given in that particular insurance policy add-on.
To receive benefits from a personal loan insurance policy, you will need to file an insurance claim. This can usually be done through your insurance provider’s online claims portal, phone, or email.
An insurance representative can help guide you through the claims process. They will ask you to provide key information about the claim, such as the event, date, time, and a detailed description.
When you file an insurance claim, you will also need to provide supporting documents. It is important that the documents are accurate and legitimate. Your insurer may also ask you for additional documents and clarification throughout the claims process. Documents can include:
- Physician records
- Medical bills
- Photographic proof of damages
Depending on which kind of benefits you’re seeking, you might need specific proof of eligibility. For example, if you want disability benefits, there needs to be formal healthcare proof, such as in the form of a certificate of disability from your healthcare provider.
If your claim gets approved, you will receive an insurance payout up to coverage limits. The payout amount will depend on what claim you made and other factors, such as what the covered event is and how much outstanding loan balance the policyholder has.
What happens if my claim gets rejected?
Unfortunately, personal loan insurance claims can get rejected. Personal loan insurance doesn’t usually require you to meet any deductibles (the amount you must pay out of pocket before insurance kicks in), but there are still eligibility requirements for benefits.
Here are some reasons for rejection:
- You didn’t provide the necessary documentation
- You didn’t meet the claim deadlines
- You didn’t meet coverage requirements for certain benefits
If you believe your claim should have been accepted, there are steps you can take to dispute the rejection. Go through the dispute resolution process of your insurance provider. To successfully dispute the claim, you might need to seek legal counsel, participate in discussions, or even go to court.
Personal loan insurance FAQs
1. Can lenders require me to buy personal loan insurance?
It depends. In some states, it is illegal for lenders to require that you buy a particular personal loan insurance policy as a condition for receiving a loan. Look up whether force-placed personal loan insurance is allowed where you live.
2. Is personal loan insurance worth it?
While it can be a valuable way to protect your financial interest in case an unexpected event prevents you from carrying out your debt obligations, personal loan insurance isn’t right for everyone. It can be a costly investment that doesn’t pay off in the long run.
Before you purchase a personal loan insurance policy, review the terms carefully to see whether it makes sense for you.
3. Is personal loan insurance the same as credit insurance?
No. They are similar in that they are both often associated with loans.
Personal loan insurance provides a variety of benefits to a borrower, such as disability benefits, accidental death benefits, and property damage benefits.
Credit insurance helps a borrower cover their loan payments in case of a covered event, such as unemployment or disability.
4. **Does personal loan insurance have a deductible? **
Not typically. While there are often requirements and exclusions for personal loan insurance policies, deductibles are uncommon.
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