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Loan protection insurance is an insurance policy that pays off all or some of your loan if you die, suffer a disability, or get laid off. Also known as credit insurance, loan protection insurance is an optional coverage that you may purchase upon taking out a loan or line of credit.Borrowers may consider different types of loan insurance. Credit property loan insurance, for example, can protect your collateral if the property you use to secure a loan is damaged or stolen.Is loan protection insurance worth it? Credit insurance may not be right for you if you already have enough savings or existing insurance to make required loan payments when due. Below we highlight how credit insurance works.
What Is Loan Protection Insurance?
Loan protection insurance is an optional insurance policy that pays off all or some of your loan if you die, suffer a disability, or get laid off. Also known as credit insurance, loan protection insurance may also protect your collateral if the property you use to secure a loan is stolen or damaged.Loan protection insurance covers policyholders if they’re unable to make monthly payments because of unemployment, disability, or other causes. Another name for this: payment protection insurance or PPI.This insurance may be offered for a range of loan products, including mortgages, car loans, and lines of credit. Personal loan borrowers may also have the option of buying loan protection insurance.
What Are the Benefits of Loan Protection Insurance?
Is loan protection insurance worth it? Your personal circumstances may dictate whether credit insurance is right for you. Below we highlight some loan protection insurance benefits:
Credit Score Protection
Loan insurance may cover your required monthly payments on a loan if you get laid off or become disabled. This protects your credit score, because failing to make required payments on a loan can damage your creditworthiness.
Loan Payment Protection
As mentioned above, loan insurance may cover the required monthly payments on your loan if you get laid off or become disabled. The coverage you receive from loan insurance can prevent missed payments.
Risks of Having Loan Protection
Credit insurance may have the following risks:
Extra Cost
Credit insurance premiums add to the cost of your loan. In addition to paying any required principal, interest, and fees on your loan, a typical credit disability insurance policy may cost $2.10 per month, per $1,000 of coverage.
Interest Charges
The total cost of your loan insurance policy may be added to your principal loan amount, and then the lender may charge interest on the larger principal balance. You may end up paying more total interest over the life of your loan as a result of buying credit insurance.
Is Loan Protection Insurance Required?
Loan protection insurance is generally not required. Lenders may offer credit insurance, but consumers generally have no obligation to buy it when getting approved for a loan. Credit insurance is an extra cost that makes your loan more expensive to pay off.Lenders, in some cases, may require credit property insurance on loans secured by an asset that could be destroyed, but you may choose where to buy such coverage.Again, you generally have no obligation to buy loan insurance. These are optional types of policies, ones that you can consider as a form of protection if you aren’t able to make required loan payments for a qualifying reason.
Types of Loan Protection Insurance
Loan protection insurance may include the following products:
Credit disability insurance. This covers loan payments when you can’t work because of illness or injury.
Credit life insurance. If the policyholder dies, this insurance will pay part or all of the remaining balance of a covered loan.
Credit property insurance. When personal property is used as collateral for a loan — and the asset is stolen or destroyed by accident or disaster — this policy provides protection.
Credit involuntary unemployment insurance. Lose your job through no fault of your own? This type of loan insurance may cover your monthly loan payments for a specified number of months.
Auto lenders may offer credit life insurance and credit disability insurance as add-ons to your car financing contract. Lenders must disclose the cost of optional credit insurance in your financing contract if you agree to pay the extra cost of insuring your loan.
What Does Loan Protection Insurance Cost?
The cost of loan protection insurance can vary by provider and product. A typical credit disability insurance policy may cost $2.10 per month, per $1,000 of coverage. That can amount to $105 per month on a $50,000 loan. Borrowers may shop around for better rates or superior coverage.Credit life insurance with some providers may cost $0.72 per month, per $1,000 of coverage. That rate can translate into $36 per month on a $50,000 loan. Other providers may offer higher or lower rates.
Questions to Ask Before Purchasing a Loan Insurance Policy
Here are some questions you may ask before buying a loan insurance policy:
What would my APR be if I decline loan insurance coverage?
How much loan insurance coverage will the policy provide?
May I cancel credit insurance after buying it?
Personal loan lenders may offer voluntary credit insurance. This includes credit life insurance, credit disability insurance, and credit involuntary unemployment insurance. The lender or its affiliates may profit if you decide to buy optional loan insurance coverage, and you may have the right to cancel credit insurance within a certain number of days of enrollment.Here’s some information you may consider if you’re looking for online personal loans:
Consolidating debt and financing home improvements are among the many uses of personal loans.
You may refinance a personal loan with another loan.
The annual percentage rate (APR) of a personal loan can include origination fees.
Common Reasons for Being Refused Loan Protection
Here are some common reasons for being refused loan protection:
Part-time employment
Pre-existing medical conditions
Short-term employment
Self-employment
Employment resignation
Part-Time Employment
Many part-time employees may not be eligible for credit disability insurance or credit involuntary unemployment insurance coverage. That’s because an insurance provider may require that you work at least 25 hours a week at the time of election.
Pre-Existing Medical Conditions
Policies differ in specifics, but some issuers will exclude applicants with certain medical conditions. Check the requirements for policies that interest you if this is a concern. If you don’t qualify for one, you may still fit the parameters of another company’s policy.
Short-Term Employment
A policy issuer may determine that approving a loan protection policy for someone in a short-term employment situation may also be too big of a risk — and therefore turn the application down.
Self-Employment
If you’re self-employed, check a policy’s requirements. Some policies may be available if the issuer is satisfied with the ongoing nature of the self-employment, perhaps requiring that the applicant has been successfully self-employed for a certain number of years.
Employment Resignation
In some cases, a policy may be approved for an applicant, but it would only be in force as long as the person worked at the same job that they did when applying. In some cases, that may seem like a reasonable requirement, but if the job is lost or you find a better job, the policy is no longer in force.
Alternatives to Loan Insurance
Here are some alternatives to purchasing loan insurance:
Consider Life Insurance
A life insurance policy can provide a death benefit to your beneficiaries when you die. You may also have the option of taking out a personal loan against a life insurance policy. Paying insurance premiums on a permanent life insurance policy can bolster the cash value of the life insurance policy.
Consider Disability Insurance
A disability insurance policy may pay part of your covered earnings if you suffer a short-term or long-term disability that prevents you from working. Employers may offer such a policy to their employees.
Build Your Emergency Fund
An emergency fund is a stash of money that you may access and use in times of difficulty or unforeseen hardship. You may set money aside in a high-yield savings account as your dedicated emergency fund. The savings in your emergency fund may earn compound interest.Recommended: 25 Ways to Save Money Fast
The Takeaway
Loan insurance is designed to help cover consumer loan payments, either in part or in full, if a qualifying event occurs. This could be unemployment, disability, or even death. An optional credit insurance policy may provide you with peace of mind if you need the protection.If you need funding to pay for emergency expenses, Lantern by SoFi can help. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice.Compare personal loan rates and apply in minutes.
Frequently Asked Questions
What is loan protection insurance?
Is loan protection insurance mandatory?
What is the benefit of loan insurance?
Photo credit: iStock/Vertigo3d
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About the Author
Kelly Boyer Sagert
Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
