By John Egan
Edited by Samuel MountjoyWhat Is Credit Insurance on a Personal Loan?
Quick Answer
Credit insurance refers to several types of insurance you can purchase when you get a personal loan. Depending on the kind of credit insurance, the policy might cover loan payments or pay off the balance if you lose your job, become disabled or die.
Credit insurance refers to several types of insurance you can buy when you take out a personal loan. Depending on the type of credit insurance, the policy might cover your loan payments or pay off the outstanding balance if you lose your job, become disabled or die.
What Is Credit Insurance on a Personal Loan?
Credit insurance is an optional add-on you can purchase from a lender when you take out a personal loan or line of credit. Based on the type of coverage, it can pay off some or all of a loan, make monthly payments or protect personal property.
You generally must buy credit insurance when you first take out a loan, and you typically can't add or change coverage once the loan has been originated. The insurer might either let you cancel the policy within 30 days of buying it or cancel it anytime for any reason.
Keep in mind that lenders can't reject your application for a loan or line of credit if you don't buy credit insurance from them. However, in order to qualify for a loan, you may be required to prove you're already covered or buy your own coverage.
Credit insurance normally comes with restrictions. For instance, credit insurance might not be available for credit cards, salary advance loans or real estate-secured loans. Other potential restrictions include:
- A cap on the dollar amount for the insured monthly loan payment, such as $600.
- A maximum dollar amount for the insured loan balance, such as $50,000.
- An upper limit on the eligibility age, such as 70.
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Types of Credit Insurance You Can Get on a Personal Loan
Lenders offer four types of credit insurance for a personal loan.
Credit Life Insurance
This coverage pays off some or all of your loan if you die, you lose a limb or you've been diagnosed with a terminal illness. It's issued for a sum equaling the beginning loan balance. As the balance goes down, so does the face value of the policy. If you die before the loan is paid off, the policy pays the lender what you owe at the time of your death.
Credit Disability Insurance
This health insurance typically generally makes a limited number of monthly payments if you become disabled or ill and cannot work. The total amount paid by the policy also may be limited. This coverage usually costs more than credit life insurance, and you might be required to buy it along with credit life insurance.
Credit Involuntary Unemployment Insurance
This kind of policy pays a specified number of monthly loan payments and up to a certain limit if you become unemployed due to a layoff, strike, union labor dispute, lockout or involuntary termination of employment.
Credit Property Insurance
Personal loans typically are unsecured. Credit property insurance protects personal property used to secure a loan if the property is destroyed by events such as theft, accident or natural disasters during the policy term. Credit property insurance isn't specifically tied to an event that affects your ability to make loan payments.
How Much Does Credit Insurance Cost?
The following table shows the potential cost of several types of credit insurance. The cost varies depending on factors that may include the insurance provider, type of coverage, length of the loan and age of the borrower. Insurers usually charge a one-time premium, or a monthly premium based on the monthly outstanding balance.
| Type of Credit Insurance | Monthly Rate for Individual Loan | Monthly Rate for Joint Loan |
|---|---|---|
| Credit life insurance | $0.80 per $1,000 of debt | $1.32 per $1,000 of debt |
| Credit disability insurance | $0.98 per $1,000 of debt | $1.62 per $1,000 of debt |
| Credit involuntary unemployment insurance | $0.63 per $1,000 of debt | $1.02 per $1,000 of debt |
Source: Virginia Credit Union
Is Buying Credit Insurance a Good Idea?
A credit insurance policy can help cover personal loan payments following life-altering incidents. If a policy covers the loan payments, those payments might not be missed and other bills might not be in jeopardy. Without this protection, you might face late payment fees or damage to your credit.
Although credit insurance might sound like a smart purchase, consider the pros and cons before signing up:
- The premium may be tacked on to your loan, accumulate interest and bump up your monthly payment.
- Credit disability and involuntary unemployment policies might come with a maximum number of monthly payments, and that maximum could be reached before your loan balance hits $0.
- When you submit a claim, the credit insurance company often sends payouts to the lender rather than the borrower.
- Your claim might be rejected based on preexisting conditions.
- The potential benefit goes down as you wipe out the loan balance.
- You may be able to cancel the policy and receive a full refund, but only within a narrow window like 30 days. Or you might get just a partial refund if you cancel the policy or pay off the loan early.
Alternatives to Credit Insurance
Paying for credit insurance might not be a good idea if you already have benefits or savings that you can use to cover the loan payments in case of emergency. For example, you might not want to buy credit insurance if you have any of the following:
- Emergency fund: An accident or job loss are prime examples of events that an emergency fund can help you survive. Target saving three to six months' worth of your regular monthly household expenses, including loan payments.
- Workers' compensation: If you're injured or become sick because of your work, you may qualify for workers' comp benefits—a benefit that you may automatically receive as an employee. The amount you'll receive may depend on the injury and your state's laws. At most, it may be two-thirds of your average weekly wages.
- Disability insurance: Disability insurance can replace some of your income if you're injured or sick and unable to work. You might receive short- and long-term disability insurance from your employer, or you can purchase a policy on your own. The benefit amount and payment period may depend on your previous income and the amount of coverage.
- Unemployment benefits: If you lose your job involuntarily, you might be able to seek unemployment benefits from the appropriate agency in your state.
- Life insurance: Unpaid personal debts aren't passed along to children and other relatives, with the possible exception of a spouse if you live in a community property state. A term life insurance policy might be less expensive and offer better benefits than credit insurance, especially for young, healthy applicants.
None of these options is a full substitute for your income if you can't work or you lose your job. But they may supply enough money to cover loan payments and other monthly bills.
The Bottom Line
Credit insurance may be a cost-effective way to cover loan payments if you die, or you're injured or sick and can't work. This can be a relief to you and your family. However, look at the pros and cons of credit insurance, particularly policy limitations, and weigh the alternatives before you decide to buy credit insurance. To keep on top of your credit, get a free credit report from Experian, which also provides your credit score (both updated daily) and alerts of changes to your credit report.
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About the author
John Egan
John Egan is a freelance writer, editor and content marketing strategist in Austin, Texas. His work has been published by outlets such as CreditCards.com, Bankrate, Credit Karma, LendingTree, PolicyGenius, HuffPost, National Real Estate Investor and Urban Land.
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