What you need to know about personal loans credit insurance

Personal loan protection insurance can be a useful tool to help protect you from defaulting in the event of an emergency, loss of income or unexpected change of circumstances. However, the added security of personal loan insurance can be costly, and in some cases, unnecessary.

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What is personal loans credit insurance?

Most loan protection insurance policies cover certain events for a short-term period, relieving you from having to make payments for a set period, usually between 12 and 24 months. According to the Federal Trade Commission, there are four types of loan protection insurance, each of which covers different situations.

• Credit life insurance: If you pass away before repaying all of your loans, this policy pays off either some or all of your remaining balance.
• Credit disability insurance: This is sometimes referred to as accident and health insurance, which gives you temporary relief from making payments if you can’t work for health reasons.
• Involuntary unemployment insurance: If you get laid off or lose your job, this policy can cover your loan payments for a while.
• Credit property insurance: When you use personal property as loan collateral, this insurance protects the property itself rather than your loan payments.

How does credit insurance work?

If one of the events outlined in your credit policy takes place, such as death, disability, or involuntary unemployment, for instance, then a credit insurance policy will typically kick-in and pay all or some portion of your outstanding debt. Or it will make your monthly debt payments for a set period of time, depending on the circumstances that triggered the claim.

The money will be paid directly to the lender or creditor. This is what distinguishes credit insurance from other types of policies, such as life insurance, which makes payments to  designated individuals such as family members or yourself. While you’re the one paying the premiums for credit insurance, the policy is designed to benefit lenders.

Who needs credit insurance?

Individuals who want to ensure that payments toward a credit account remain in good standing, in the event of disability or death, might benefit from credit insurance. For example, a situation when this might come up is for a mortgage on a primary family residence.

In most cases, however, personal loan insurance isn’t worth it. The extra costs can make your loan more expensive and put you at risk of default. Also, if you have life or disability insurance, it’s likely more affordable than investing in credit insurance.

Sometimes, however, personal loan insurance may make sense. If you have a loan that you can’t defer, for example, or you’re concerned about debt due to a medical condition, job loss, or death, it can be an option.

Cost of credit insurance

Credit insurance is almost always more expensive than other types of insurance such as term life insurance. The amount you’ll pay will depend on factors like loan or credit type, the amount of debt that will be protected and the type of insurance policy and lender you choose.

The US Government Accountability Office found that debt protection insurance fees ranged from $0.85 to $1.35 per month for debt insurance for credit cards. Although it doesn’t look like much, the cost adds up for high-balance loan amounts.

According to Wisconsin’s Department of Financial Institutions, the credit life insurance premium on a $15,000 car loan with a four-year term at 9% costs $301. For credit disability insurance, the cost can climb higher. It found that alternative protections, like term life insurance have a lower premium than getting a credit insurance policy upon signing for a loan.

Whether or not your loan or credit is open like a credit card or closed like an installment loan can also play a role in the cost of credit insurance.

Pros and cons of loan protection

While there are some benefits associated with loan insurance, there are also drawbacks to consider when deciding whether it is the right financial move for you.