Many people who default or are at risk of default may not know about personal loan credit insurance. If you lose your job or experience a disability and are unable to pay your loan back, credit insurance can pay the lender directly and help ensure you won’t default.
When you borrow a personal loan, your lender may offer the option of purchasing credit insurance along with it. Credit insurance policies have certain restrictions, however, and can add to your cost of borrowing, so they may not be necessary.
What is personal loan credit insurance?
Personal loan credit insurance helps cover payments on your personal loan if you’re unable to do so. A credit insurance policy might kick in if you lose your job or become disabled. It may also apply if you pass away.
There are four main types of personal loan credit insurance:
- Credit involuntary unemployment insurance: Also known as involuntary loss of income insurance, this type of policy can make loan payments if you’re laid off or otherwise lose your job for reasons out of your control.
- Credit disability insurance: This type of insurance can make loan payments if you can’t work due to illness or injury. It’s also known as accident and health insurance.
- Credit life insurance: This is a type of policy that can pay off the loan’s balance if the borrower passes away.
- Credit property insurance: This type of credit insurance helps protect any collateral that you used to secure the loan, which could apply if you borrowed a secured personal loan, rather than an unsecured one.
Important
If you already have satisfactory coverage from some type of health, life, or property insurance policy, you may not need to get credit insurance.
How does personal loan credit insurance work?
You can usually purchase credit insurance when you take out a personal loan. The rules of each policy may vary, so make sure to read the fine print about what your policy covers and any restrictions that apply.
For example, some policies may not approve claims based on preexisting conditions. Plus, some policies only cover payments for a certain amount of time or up to a certain age of the borrower, rather than making payments for the remainder of your loan.
If you file an eligible claim, your credit insurance issuer will likely send payments directly to your lender. If your insurance is covering payments, you won’t have to worry about your loan becoming delinquent or damage to your credit.
The cost of personal loan credit insurance
The cost of personal loan credit insurance can vary widely depending on the policy you choose, the coverage you want, and the state where you live. Before purchasing personal loan credit insurance, it’s worth comparing alternative options, such as disability insurance or life insurance. You might find more affordable options for these plans, especially if your employer offers them as benefits.
You may also be able to reduce the cost of personal loan credit insurance if you can pay for the entire premium upfront. If you roll the amount into your monthly loan payments, you’ll pay interest on this higher balance, resulting in a higher overall cost of borrowing.
Keep in mind
While credit insurance can cover you in case of a life-altering event, it’s often not worth the cost. The premium is often included in the total loan amount, meaning you’ll pay interest on it over the life of the loan.
Pros and cons of personal loan credit insurance
While credit insurance can protect you if the unexpected happens, there are some considerations to keep in mind before getting coverage.
Pros
- Can protect you if you can’t pay back your loan: Personal loan credit insurance can cover your loan payments if you lose your job or experience a disability. This protection can ease stress while you deal with these unexpected challenges.
- May prevent your credit from getting damaged: If your insurance covers payments, you won’t have to worry about defaulting on your personal loan and having your credit score damaged as a result.
- Coverage is optional: While a lender may offer credit insurance, it’s not required to borrow a personal loan. They also can’t pressure you into buying it along with taking out the loan. You can decide whether purchasing a plan makes sense for you.
Cons
- May be more expensive than other types of insurance: Personal loan credit insurance may be more costly than alternative insurance plans that can offer similar protections, such as disability or life insurance.
- Will increase your cost of borrowing: The cost of credit insurance is often rolled into the loan, increasing your monthly payments and interest charges.
- Restrictions may limit how useful the policy is: Your policy may only cover loan payments temporarily, for instance, or it may reject claims based on preexisting conditions.
Should I get personal loan credit insurance?
The delinquency rate on consumer loans was 3.75% in the third quarter of 2023, according to TransUnion data. Personal loan insurance may give you peace of mind about your loan payments, but it’s not necessary for every borrower. Again, if you already have life or disability coverage, you may be covered in the event of unexpected circumstances without the added expense.
It’s also worth considering your budget. Loan insurance can add to your borrowing costs, so consider whether the added expense is worth it. If the extra amount is unaffordable, you might alternatively funnel some money into an emergency fund to shore up your savings.
Check out the plan’s fine print, too. Pay attention to what the plan covers — and what it doesn’t — to ensure that it’s sufficiently useful to justify the cost. the Federal Trade Commission recommends asking the following questions:
- How much is the premium, and will it be financed as part of the loan?
- Is it possible to pay monthly instead of financing the entire premium with the loan?
- Will my monthly loan payment be lower without the credit insurance?
- Will the insurance cover the full loan amount and repayment term?
- Is there a waiting period before coverage kicks in?
- What coverage does a co-borrower have?
- What’s covered and what isn’t covered?
- Is it possible to cancel the insurance and get a refund?
By combing through the details of the plan, as well as comparing alternative options, you can determine whether personal loan credit insurance is right for you. And remember that this insurance is optional — a lender can’t deny your personal loan if you decide against purchasing a plan.