When you apply for a new loan or get a new credit card you may be asked if you want credit insurance. This typically comes in your application or with your bills. The purpose of credit insurance is to pay off your debt in case you are unable due to accident, illness or loss of employment. There are times credit insurance can be beneficial and worth the cost. However, before deciding if credit insurance is necessary for your loan, you should be aware of some fundamental facts regarding it and you should ask some pertinent questions so you are fully informed.
Basic Facts
- It is not required to have credit insurance to secure a loan
- Credit insurance is available only through the financial institute where your loan is secured
- The payout will go to the lender if it is applied
- The premiums pay toward your balance so if your balance is lower the benefit is also lower, typically without any decrease in premium
- There may be conditions as to whether or not you qualify or whether or not it will pay out
- There may be balance limits so it is possible your entire loan amount will not be paid off
- The lender may cancel your benefits even if you have paid consistently
- There are various types including life, disability and unemployment that may be available singly or as a package. You may or may not have a choice as to what you purchase
Questions to ask
- Is there another asset you can use to pay your debt if necessary that could be cheaper in the long run?
- Is a traditional insurance policy better suited to your needs and cheaper?
- Is there a monthly fee or a one time premium? If there is a one time premium is this lumped into the monthly balance or added to the principal and financed?
- How much of the balance is covered?
- What are the terms of payout as well as the time frame for completion?
- Can it be cancelled at any time? Under what conditions?
- Can the policy be terminated or conditions changed? What notifications are necessary if this is allowed?
After looking closely at all the policy’s terms, you may still think the credit insurance is beneficial and relatively inexpensive per month. This may be the case but look closely at alternative solutions. It is likely that you can get a traditional insurance policy such as a life or disability policy that will give you increased benefits and appreciate over time all for a similar price. Even if credit insurance is affordable, shop around for other alternatives to pay your debt in case of emergency. You may find that over time your premium is not worth the reward. Simply do the math over the course of several years and calculate how much overall you will pay in premiums. Compare this to the cost of a traditional policy and then look at the benefits for payout. Which one will be best for your needs?
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