There are many different types of insurance products. You’ve most likely heard of life insurance, auto insurance, and homeowners insurance. While these are some of the most common types of insurance policies, they’re far from the only ones available. There are also some lesser-known options, including credit insurance.
Credit insurance is a type of insurance policy you’ll typically find through lenders. You can purchase it to pay off certain debts you might have should you pass away unexpectedly. Some policies can cover your debt in the event you’re out of work for a while. Here, we’ll take a closer look at credit insurance, how it works, how much it costs, and if it’s right for you.
Life is unpredictable. No matter how much you plan and take careful steps, situations like job loss, serious injury, and even death can happen at any time. If you have debt, finding yourself in a situation where you’re unable to make payments (or leaving debt behind for your family to figure out) can be scary.
Credit insurance can help to alleviate some of that stress. It’s an optional policy you can typically purchase from a lender that can cover some of your debts in the event of your death or you’re unable to work.
While it might seem like a type of disability or life insurance, there is a significant difference. Credit insurance does not pay you (or your family). Instead, it’s there to ensure your creditor continues to receive payments even if you’re not the one actually making them.
Also known as “credit protection” or “payment protection insurance,” you’ll often find credit marketed as a feature of credit cards, and you’ll usually pay a small percentage of your card’s unpaid balance every month. Auto loan, unsecured installment loan, and bank or credit union loan lenders may also offer it as an option you can add on.
You’ll find credit insurance policies structure in one of two ways. A single premium policy is one in which the total cost of your policy gets tacked onto the outstanding balance of your credit card or loan. As a result, you pay interest on the cost of your policy.
With a monthly premium policy, your policy has a “premium rate.” That typically refers to a cost per $100 of your debt. When your balance changes, so, too, does your premium.
Most credit insurance policies are guaranteed acceptance or have limited underwriting. You don’t have to worry about answering questions about your medical health or undergoing any exams.
One thing to keep in mind is that credit insurance policies may have age limits attached. People over the age of 65 may be ineligible. If you do have a policy, it may expire when you turn 65.
There are a few different types of credit insurance, and some lenders will bundle more than one type in a single policy. If you’re considering a policy to cover your debt, understanding what’s available will help you select the best option for your needs.
Credit life insurance is a policy that continues to make your loan or credit card payments in the event of your death.
Credit disability insurance is a type of policy that pays a monthly benefit to your creditor if you become disabled. The number of payments is typically limited, and they’re equal to your minimum monthly payment.
There are a few things to keep in mind with credit disability:
You must be disabled for a certain amount of time before your policy will pay your benefit
There may be a waiting period, which ranges on average from 14 to 30 days
The benefit is retroactive
You may also find credit disability insurance referred to as “credit accident and health insurance.”
Jewelers, furniture retailers, and other companies that sell high-cost items may offer a type of credit insurance known as credit personal property insurance. You may decide to take out a policy if you use a loan to purchase an expensive ring, sofa, or other types of costly items. It continues to make payments to your lender if the item is lost or stolen.
Credit involuntary unemployment insurance provides coverage should you lose your job through no fault of your own. The policy will pay a limited number of benefits equal to the minimum monthly payment of your loan or credit card.
You do need to be unemployed for a certain number of days before the credit insurance kicks in. And, like credit disability, there may be a waiting period. In many cases, that waiting period is 30 days.
With credit family leave or leave of absence insurance, your policy covers your loan or credit card payments in the event that you take a temporary leave of absence from work to care for a family member. Again, your benefits are limited to a specific number of months.
As with other types of insurance, the cost of credit insurance will depend on several factors. Common factors that may impact how much you pay include:
Your state of residence
The type of credit insurance you select
The type of loan you have
The loan amount and term
Another factor that can influence the cost of your credit insurance policy is the commission that insurers pay to the lenders offering the insurance policies. As such, the premiums are typically more expensive than those you would pay for traditional life insurance.
If you take out a policy for a loan, your monthly premiums will increase. If your policy is for a credit card, what you pay each month will fluctuate based on your current balance.
One thing to keep in mind is that credit insurance is optional. You do not need to purchase a policy if you don’t want to or don’t need to. However, a policy could provide protection in certain situations.
Credit insurance can protect you if you become disabled or suddenly unemployed involuntarily. It can also protect your family from having to pay off your remaining debts should you pass away unexpectedly. It’s not your only option, though.
If you’re looking for financial protection, insurance is just one solution. It is generally more expensive than options such as life insurance or disability insurance. When lenders provide you with the total cost of your loan, they don’t include credit insurance in the amount. Your actual payments with coverage could become unaffordable depending on the type of credit insurance you choose.
If you can qualify for other types of insurance, such as life or disability, you may end up paying less going with one of these policies. Should you have no other options and still want some protection for your outstanding debt, you might consider credit insurance.
With credit insurance, you can provide yourself and your family with peace of mind. A policy can continue to pay your credit card or loan payments should you become unemployed, disabled, or pass away. Remember, though, the cost of a policy can be higher than that of a life or disability insurance policy. Weigh your options carefully to ensure you get the best protection for the best price possible.