If you have ever applied for a home or personal loan, you were probably offered loan protection insurance. Maybe you were overwhelmed and didn't ask too many questions regarding the specifics of this type of insurance, or perhaps you figured it was an added expense you just didn't need.
It could be you are just starting to look into applying for a loan. In the beginning, it makes sense that you might have no idea what loan protection insurance does for you and whether you actually need it
Loan protection insurance will provide you or your loved ones with some protection from a financial burden by paying the loan balance in the event of your death or making monthly payments if you become unemployed or disabled.
Keep reading for more information about loan protection insurance and whether its actually worth it.
Loan Protection Insurance
We purchase insurance to keep many aspects of our life protected, and loan protection insurance can be that safety net when it comes to your loan.
With this type of insurance, you and your family can avoid the financial burden that might come if something unexpected happens while you have a loan. Typically, loan protection insurance will pay the balance of the loan in the event of your death. If you become unemployed or disabled, your insurance will make those monthly payments, so you don't have to worry about falling behind.
Loan protection insurance isn't just for a home loan or a car loan. This type of insurance can be purchased for personal loans or even credit cards. With open-ended loans like credit cards, you will typically pay a monthly fee, which is determined by the loan balance. Because your balance will increase and decrease as you make purchases and payments, the insurance cost can fluctuate.
With closed-ended loans, like home or auto loans with a set repayment time frame and amount, loan protection insurance will be set from the start of your loan. You will often pay for the loan protection insurance when you take out the loan in a one time upfront fee.
Policies can be capped or come with other restrictions, so be sure you know exactly how your policy will work before you commit. You might find that there are waiting periods before a payout happens, or some policies might not payout if you have a consigner. We can stress enough that reading the fine print is so important to understand your coverage.
These insurance policies can also vary in cost based on your age, credit history, or current outstanding debt.
Be sure to understand that these are customarily short term protections that will only cover you for a certain length of time. Read your policy to understand how long the policy will make payments if you are disabled or employed. Often these policies will only provide coverage for up to two years.
Do I Have To Purchase Loan Protection Insurance?
While your lender might highly recommend loan protection insurance, you are not obligated to purchase it. They cannot make it a requirement or a condition of lending you any sum of money. They also cannot just add it to your loan without disclosing that information, and they cannot add it without your permission. It will likely be offered to you, but do not believe that you must purchase loan protection insurance.
Do I Need Loan Protection Insurance?
Before you decide to purchase loan protection insurance, you need to be sure it is right for your situation because there are other alternatives out there.
An obvious benefit to loan protection insurance is that you will be covered in the case of unemployment or disability. Keeping up with payments on your loans will help maintain a good credit score.
But there are other options when it comes to having a policy that pays your bills in the event of a crisis. You could look into disability insurance or a term life insurance policy. With disability insurance, you will be able to make payments on all of your bills, not just the specified loan or loans the loan protection insurance is attached to. Similarly, if you have term life insurance, your family or loved ones can use the death benefit to make payments on a variety of debt or for living expenses rather than a specified loan.
We can't tell you definitively that loan protection insurance is or isn't for you. You will need to look at your current financial situation and decide if another option would be a better fit or if loan protection insurance will protect you and your loved ones the best.
Loan protection insurance can be an added safety guard to protect you and your loved ones in times of financial crisis, but you first need to determine if it is right for you. It is always important to read the fine print to ensure you understand the terms, rates, and payout information.