If you’re worried about your loan balance in case something unexpected and disruptive occurs, consider getting personal loan insurance. While investing in personal loan protection isn’t right for everyone since it is often unnecessary, it’s still a good idea to be aware of your options.
Let’s go over the different types of personal loan insurance you should know about.
Credit life insurance
Credit life insurance helps pay off outstanding debt in case the policyholder passes away. It is completely separate from regular life insurance and may be offered by your lender when you obtain a large loan amount.
How does credit life insurance work?
When taking out a loan, you can opt into buying credit life insurance. This means you will have to pay a premium for insurance coverage to be active over the life of your loan. It can either be a flat premium you pay at the start of your loan tenure or a recurring fee you pay in addition to your loan balance.
The premium is calculated based on various factors, such as your age and if you have any pre-existing health conditions. The cost typically ranges anything between 0.5% to 2% of your loan balance, but it’s important to review the terms of your insurance policy before agreeing to it since insurance costs can vary greatly.
Credit disability insurance
If you become disabled and lose the ability to work, credit disability insurance helps cover loan payments. Usually, credit disability insurance requires you to be actively working at the time you purchase it. Some policies also revoke coverage for certain disabilities or pre-existing conditions.
With the various conditions and relative unpredictability, credit disability insurance might not be worth it for many people. If you’re looking for monetary assistance in case of disability, it might be advisable to look into other kinds of disability, unemployment, or worker’s compensation protection.
What does credit disability insurance cover?
The definition of disability varies depending on your chosen insurance policy. Each policy should outline in detail what events are covered, and whether there are special exclusions. Credit disability insurance commonly provides coverage for cases where:
- You become disabled, unable to perform your usual work
- You become disabled, unable to perform any work you would’ve otherwise been qualified for
- An illness, injury, or disability prevents you from meeting your loan repayment terms
How does credit disability insurance work?
If you meet the conditions outlined in your insurance policy, your credit disability insurance will kick in and help you with your monthly loan payments. This may be a portion of your monthly installment amount, such as 60%, or the entire monthly payment.
To meet the conditions that get your loan payments covered, you need to qualify as disabled according to your policy’s eligibility requirements. In addition, there might be a waiting period before benefits start being active. This means that if you purchase credit disability insurance, you won’t receive its benefits until the designated waiting period (typically a month or two) is over.
Credit involuntary unemployment insurance
If you lose your full-time job but it isn’t your fault, credit involuntary unemployment insurance will kick in and make loan payments for you.
Common involuntary unemployment situations include:
- General strikes
- Company layoffs
- Unionized labor disputes
- Involuntary employment termination
- Employee lockout
In most states, only someone who is employed full-time, working 30 hours a week, can be eligible for involuntary unemployment insurance coverage. This means that if you are self-employed, you may not qualify for involuntary unemployment insurance depending on where you reside.
Payment protection insurance
You may have heard about payment protection insurance (PPI), which is an insurance product in the United Kingdom. It is also known as loan repayment insurance and credit insurance. PPI is meant to provide coverage to those who have personal loans, credit cards, or other types of credit that can put them into debt.
UK banks, lenders, and other financial institutions have mis-sold PPI to consumers, resulting in a scandal. This was followed by a compensation program that has allowed people to file PPI complaints for refunds.
In the United States, PPI is not typically sold. Instead, the US has other kinds of credit insurance and debt protection plans. The primary ones are credit life insurance, credit disability insurance, and credit unemployment insurance.
Loan protection insurance
Also known as debt protection insurance, loan protection insurance is meant to cover your outstanding loan balance in case of covered events. It is the general term for various kinds of personal loan insurance products, the more common ones being credit life insurance, credit involuntary unemployment insurance, and credit disability insurance.
When you obtain a loan, loan protection insurance might be offered by your lender. This is generally optional as no creditor should force you to purchase an insurance policy.
Coverage for loan protection insurance varies depending on which product you buy. It may extend to events such as:
- No-fault unemployment (layoffs)
- Death of the policyholder
Different states can have their own regulations and eligibility requirements surrounding loan protection insurance products. Since loan protection insurance is an additional insurance product you would have to purchase, it would increase the overall costs of obtaining a loan.
If you aren’t sure whether you’ve purchased loan protection insurance after obtaining your loan, you can confirm with your lender to see whether you have active insurance coverage.
Loan gap insurance
Loan gap insurance is sometimes called guaranteed asset protection (GAP) insurance. It is most commonly used to cover the gap between a vehicle’s actual cash value and the remaining balance on an auto loan. Loan gap insurance kicks in if there is a covered event, such as auto theft or the total loss of the vehicle.
How does loan gap insurance work?
When a car gets financed by a loan (or leased in the case of lease gap insurance), its actual cash value typically goes down faster than you can repay the loan. This can be troublesome since in the event of a severe car accident or theft, most car collision insurance policies only cover the actual cash value of your car. That actual cash value amount you receive from the auto insurance payout is likely insufficient to pay off your outstanding loan amount.
When loan gap insurance kicks in, it helps bridge the gap between the insurance payout of your car’s actual cash value and how much you would still need to repay your loan. This can help you save money in case you need to make a total loss claim with your auto insurer but don’t receive enough money to repay your auto loan.
When does loan gap insurance provide coverage?
If an unexpected, covered event happens to the vehicle that you financed with your auto loan.
Commonly covered events include:
- Total loss
- Significant damage
Is GAP insurance worth it?
If you have an auto loan for a car that you know is depreciating in actual cash value more quickly than you can pay off the loan, it might be a good idea to consider GAP insurance. Someone with an auto loan term of over 5 years can also benefit more from this kind of insurance.
Another reason you might want loan gap insurance is if you lease your car. GAP insurance can likely give you more value in this case.
GAP insurance has the potential to save you thousands of dollars in case of a total loss. However, you will likely need to pay a recurring premium each month, which can add up over time. If you don’t owe much more than the actual cash value of your car, GAP insurance might not be able to give you enough value to warrant paying an extra insurance premium.
Collateral property insurance
For secured loans, you need to put up assets as collateral. If you end up missing payments or defaulting on the loan, your lender will have the right to seize the collateral for themselves. But what happens if your collateral assets get damaged? That’s where collateral property insurance comes in. The borrower can purchase and maintain this kind of insurance to safeguard the value of the collateral.
Since collateral property insurance is considered to be more beneficial for the lender, it is usually a force-placed insurance policy. Lenders might designate in the loan agreement that you must buy collateral property insurance if you sign the contract.
When you get ready to enter a loan agreement, read your terms and conditions carefully to see whether your lender has made collateral property insurance mandatory.
What does collateral property insurance cover?
Collateral property insurance protects the value of personal property that has been used as collateral assets. It’s up to you to ensure that the policy provides enough coverage for the valuation of your collateral.
This kind of insurance kicks in in your collateral assets get:
- Unexpectedly damaged by a covered peril
Debt cancellation insurance
Debt cancellation insurance can help you cancel out your debt in case a covered event prevents you from being able to repay the loan. Policy requirements vary, but debt is typically eliminated in cases such as:
- Unexpected hardship
For debt cancellation insurance, it is essential that you are aware of which cases the insurance policy would actually eliminate your debt for you. This means that you need to meet the eligibility requirements and avoid specific exclusions.
Debt cancellation insurance can potentially be helpful in ridding you (and/or your family) of the financial burden that comes with debt. However, there are also alternatives to debt cancellation insurance that can make more sense to you. For example, life insurance or even life credit insurance might offer more value in terms of the policy’s death benefits.
Debt suspension insurance
Debt suspension insurance is similar to debt cancellation insurance, but there are some key differences. If you meet the requirements, debt suspension insurance will help you temporarily suspend active debt.
Suspension typically means that:
- Your debt won’t accrue interest (or it accrues at a lower rate)
- You won’t need to make monthly payments
- After the period of suspension, you will regain the obligation to repay your debt
When does debt suspension activate?
In case of a covered event, debt suspension insurance kicks in so long as you meet all the requirements and avoid the exclusions detailed by your insurance policy. Covered events may include:
- Other specified events
When you purchase debt suspension insurance, it could be either a one-time premium or a recurring fee.
Credit card insurance
Also known as credit card protection insurance, this kind of policy helps financially protect credit cardholders.
Credit card insurance typically provides coverage for:
- Fraud: If there is fraudulent activity on your credit card, such as unauthorized transactions being made, credit card insurance may reimburse the expenses.
- Identity theft: If a criminal tries to steal your identity and take control of your credit card, credit card insurance can help you pay for expenses related to recovering your identity.
- Card replacement: Credit card insurance can cover card re-issuance fees and other related expenses in case you lose your credit card.
- Temporary payment assistance: If you become disabled, sick, or otherwise unable to pay your credit card bill, your insurance can help cover your bill for a specified period of time.
- Involuntary unemployment: If you lose your job, credit card insurance might help you cover your monthly credit card payments while you search for a new place of work.
Note that the insurance policy might only cover the minimum monthly payments for your credit card.
Do I need personal loan insurance?
Personal loan insurance isn’t right for everyone. However, it could offer you valuable benefits depending on your circumstances.
If your creditor offers you a personal loan insurance policy, take care to review the terms and conditions. Insurance policies need to list what they cover (or exclude), so even if you have purchased coverage, failing to meet requirements can result in a lack of financial assistance.
Make sure you weigh the pros and cons of obtaining a personal loan insurance policy to see whether it makes sense in your personal situation.
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