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About Credit Insurance
When you get any loan or mortgage your lender is expecting you to make the payment of the debt in full.
However, how can a lender receive the loan if the borrower is unable to pay the debt due to loss of life, disability, or un-predicted unemployment?
That is where credit insurance comes into the picture. In this post, we will know what is credit insurance in detail.
What is Credit Insurance?
Many people know about life insurance, health insurance, car insurance, and homeowner’s insurance.
But not many people talk about or take advantage of what they call credit insurance.
Credit Insurance is a policy that offers you protection from missed installments on a debt due to loss of job, sudden death, or disability.
Credit insurance can be taken on any kind of debt like car loans, mortgages, appliance loans, credit cards, etc.
How Does Credit Insurance Function?
When you are applying for any debt your lender or creditor has an option where you can buy the credit insurance along with the debt.
Now in an event of death, disability, or sometimes unemployment, where the payment of the debt needs to be paid in full or partial, this credit insurance will cover the entire expense of your debt in question.
Credit insurance is not a compulsion to buy. Your lender cannot add credit insurance as a component of the loan service and sell it as a compulsion.
According to the Federal Trade Commission, it is illegal to include credit insurance as a component in the debt service without intimating you about it.
When is the Right Situation to get Credit Insurance?
The short response is never. Since credit protection is discretionary and can add additional expenses for your debt, it might make your debt more expensive and have higher chances of defaulting on the debt.
Also, if you have a Life protection policy or a handicap protection policy of any sort, your coverage cost could be way less compared to getting credit insurance.
There are a few occurrences when you should think about credit insurance, like, debts that you are unable to put into forbearance or defer.
Before deciding on getting credit protection, it’s better to get some more information about any other programs they may have to help if you lose your employment or can’t keep making your monthly payments. For example, settlement, or debt forgiveness programs.
Types of Credit Insurance:
1 - Credit unemployment insurance
In case you get laid off at work involuntarily, the credit insurance will cover your debt by making monthly payments to the lender helping you to maintain your credit through the difficult times.
In order to avail of the benefit of credit insurance in such a situation, one must cross the certain number of days as unemployed. The benefit will only start after the waiting period is completed.
2 - Credit disability insurance
This type of credit insurance will cover your debt by making monthly payments to your lender in case you become disabled due to an accident or disease without affecting your credit.
In most cases, the benefit of credit insurance in such circumstances could only be taken if a specific time is completed for the disability. In some cases, benefits can be given from the first day of the disability.
3 - Credit life insurance
This type of credit insurance is for clients who are worried about debt after death. In an event of death of the borrower the credit insurance will cover the partial or complete balance of the debt.
Conclusion
Though credit insurance might look like a good option, it is one of the most costly options out there.
If you already have any other insurance or assets which could cover your loan in case of any situation like death, disability, or unemployment you might want to avoid taking credit insurance.
If you don’t have any other insurance, ensure you shop around before you get the credit insurance as getting any other insurance could make more financial sense.
If you are still convinced to take the credit insurance ensure that your credit insurance covers the entire debt and the lender won’t be able to make any changes to the insurance without your consent.
While credit Insurance might appear as a better option, it can add huge expenses for your debt.
If you still decide to get it, ensure you completely comprehend the terms of the policy and any impediments.
And if you are still confused and unable to make your mind whether or not to buy credit insurance, you can also set aside the amount of money that you were otherwise going to pay monthly for credit insurance in the reservation account.
This will help you to build your own savings in such kinds of situations.
