When you take out a loan, you’ll be offered all kinds of bells, whistles, and add-ons. One that you might want to carefully consider is loan protection insurance. The better you understand the benefits this type of protection offers, the more important it may sound to you. Just make sure you have all the facts before you dive in. Here’s what you need to know about loan protection insurance to decide whether this is the right solution for you.
What is Loan Protection Insurance?
Loan protection insurance is a type of insurance that promises to pay off or suspend loan payments if certain circumstances arise that render you unable to repay the loan. Common occurrences include:
- Death
- Disability
- Job loss (in a manner that is not your fault or your choice)
Some loan protection insurance offers another benefit worth considering: credit property insurance that provides protection if the personal property you used to secure a loan is damaged or destroyed by theft, accident, or natural disaster.
While many lenders may recommend purchasing this type of protection, it is essential to know that they must obtain your explicit consent before including loan protection insurance in your agreement.
Types of Loan Protection Insurance
There are four different types of loan protection insurance.
- Credit life insurance that pays off your loan if you die.
- Credit disability insurance makes loan payments if you become disabled via illness or injury.
- Involuntary unemployment insurance makes loan payments if you involuntarily lose your job (which isn’t your fault).
- Credit property insurance protects you if your loan collateral is stolen, damaged, or destroyed by a covered event.
As always, reading the fine print for potential exclusions and exceptions is essential, as comparing your options before purchasing loan protection insurance. Not all policies, after all, are created equal.
Pros and Cons of Loan Protection Insurance
The apparent benefits of loan protection insurance are challenging to dismiss or ignore. The primary use is that loan payments continue if a covered event occurs. Additionally, you get to maintain your good credit score since you’re not missing payments you might not otherwise be able to make. People in tight financial situations might wish to purchase this type of policy for the peace of mind it delivers.
While the benefits of loan protection insurance can be appealing, it is essential to carefully weigh the pros and cons. Make sure to gather accurate information from your lender and ask questions to fully understand the terms and conditions of the insurance policy. Remember that interest rates are typically not affected by the purchase of loan protection insurance. Another problem is that it is necessary to read the fine print. Some of these policies come with sufficient exclusions and exceptions built in that they are essentially useless when the time comes to “cash them in.” Also, loan protection insurance increases your monthly payments. If your budget is already tight, this could be an unnecessary burden. On the other hand, if you’re on a tight budget, this might be something you view as essential.
Finally, not everyone needs this type of protection, and some people already receive similar protection from employers or other insurance policies and do not need the additional protection. Make sure you know what you’re signing up for when you buy loan protection insurance if you choose to do so.
How to Purchase Loan Protection Insurance
Buying loan protection insurance is easy. Most lenders will offer it, from one of their preferred vendors, of course, when you take out the loan. However, you can purchase it on your own and take the opportunity to compare offers, costs, and terms online.
Alternatives to Loan Protection Insurance
If you’re still on the fence, there are alternatives to consider to help you meet your needs in the event of an emergency. Some of these options include:
- Emergency savings account
- Disability insurance (long and short-term)
- Workers’ compensation insurance
- Term or whole life insurance protection
- Unemployment insurance benefits
In most instances, there are alternatives to help you repay your loans until you can return to work to pay for the loan yourself or in the event of your death.
Making a Loan Protection Insurance Claim
Each loan protection insurance policy is different, and each company will have its own claims process. Ensure you stay updated on all the procedures and documentation necessary to file a claim should you need to use your loan protection insurance policy.