In the simplest terms, credit insurance will cover the cost of your loan or credit card payments in the event that you are unable to pay the loan. It is insurance purchased by the borrower to cover their debts in case of any sudden eventualities such as death, or unemployment.
In most cases, credit insurance will not be marketed as a stand-alone type of insurance, but as one of the features of a credit card and usually charge a low percentage on any unpaid credit card balance.
How Credit Insurance Works
Unlike other types of insurance that we are familiar with, that is, life insurance, auto insurance, and such, this type of insurance comes as an extra service that is offered by the credit card issuer. It is offered to the credit card holder the moment you apply for new credit or later in the life of the loan.
Depending on the company and the amount of credit you get, you will find that the insurance premiums will vary accordingly. But in general, the higher the amount of debt, the higher the insurance premiums. In most cases, you will pay the premiums as with other monthly bills until the moment you use it or even cancel the credit card.
In some other cases, this credit will be charged to your account as a lump sum and will be included in the cost of the loan. When you make a claim, the insurance will be paid directly to the lender.
Types of Credit Insurance
There are 5 types of credit insurance;
- Credit Life: which will pay off your credit card balance if you die. This will provide a cushion against your loved ones from the credit card companies. They won’t have to pay a dime out of their pockets to pay your debt.
- Credit disability: this type of credit insurance is also known as credit accident and health insurance and basically what it does is pays your minimum payment directly to the credit card issuer if by any chance you become disabled.
- Involuntary unemployment credit insurance: this is the insurance that will cover your minimum monthly payment when you lose your job or when you have been downsized. Any purchase that you make after an involuntary lay-off will not be covered by the card.
- Credit personal property: this is mostly offered by jewelry or furniture stores and it is a type of insurance that will pay the lender the amount lost if the item you bought is stolen or destroyed.
- Leave of absence: this is another type of insurance that makes a limited number of monthly payments to the lender if you have to take a leave from work in order to care for a family member.
In some cases, a lender may bundle up several credit insurances into a single offering.
How Much Will Credit Insurance Cost You?
This will be largely dictated by the type of loan that you take, the amount, the terms of the loan, the type of insurance you want, and your location. As previously stated, when you get approved for a loan, you automatically qualify for the insurance. In most cases, the commissions influence the price of the premiums you will pay on a monthly basis and this makes credit insurance more expensive than regular insurance.
People who pay credit insurance usually pay a large loan amount each month, because of the interest on both the loan and the added insurance premium. For revolving loans like credit cards, the premium will be added to the monthly statement and will vary accordingly depending on your card’s balance.
Is Credit Insurance Right For You?
Do not just take credit insurance! Consider where you are financially and your future financial needs. If you already have other insurance covers such as life insurance, that may be all that you need. In as far as finances are concerned, credit insurance may not be the ideal and cost-effective route to take. They are not very flexible as compared to the traditional life and disability policies.
If you are not sure whether you will be able to pay the loan, it is advisable that you use the money that would have been channeled to the credit insurance premiums to build an emergency fund. Every money that you save in your emergency fund will be channeled to cover your upkeep and pay your loans during the periods you are down financially.
Credit insurance is not the most ideal and there are other options that offer better terms. If you have any reservations, consider using an emergency fund whose money will be used to cover emergencies