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Loan Protection Insurance: What It Is & How to Use It

Loan Protection Insurance: What It Is & How to Use It
Kelly Boyer Sagert
Kelly Boyer SagertUpdated May 4, 2022
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Loan protection insurance offers short-term coverage to help people meet their financial obligations up to a predetermined dollar amount.When taking out a consumer loan, you may be asked whether you’d like to purchase loan protection insurance. Or maybe you’ve recently heard the term and you’re wondering if it’s worthwhile.

What Is Loan Protection Insurance? 

This type of insurance covers policy owners if they’re unable to make monthly payments because of unemployment or disability or other causes. Another name for this: payment protection insurance or PPI. This insurance may be offered for a range of loan products from mortgages to car loans. In this post, we’ll focus on personal loan protection insurance rather than the type associated with home loans. (Here’s more info on personal loan types.)

How Does Loan Protection Insurance Work? 

Personal loan insurance policy specifics can vary. In general, though, these policies offer short-term coverage to help people meet their financial obligations up to a predetermined dollar amount when a triggering event occurs. A typical policy may provide one to two years of coverage to pay off consumer debt. Usually, these policies are issued to employed people who are aged 18 to 65. Recommended: Personal Loans for People on Disability Benefits

Types of Personal Loan Protection Insurance 

Types of personal loan insurance include the following:
  • Credit disability insurance: This covers loan payments when you can’t work because of illness or injury.
  • Credit life insurance: If the policy owner dies, this insurance will pay part to 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.
  • Involuntary unemployment insurance: Lose your job through no fault of your own? That’s what this type of personal loan protection covers. 
Next up: a distinction between standard policies and age-related ones.

Standard Policy 

With this policy, the loan provider does not ask an applicant about their age, gender, smoking habits, or occupation. The maximum term is 24 months with an initial 60-day exclusion period. 

Age-Related Policy

In Britain, age-related policies are available for a 12-month period. The loan protection insurance cost is calculated (as the name implies) on the applicant’s age as well as the policy amount. 

Typical Loan Protection Insurance Cost 

Usually, loan protection insurance costs are higher than with a traditional life insurance policy because there is a greater amount of risk undertaken by the insurer. Costs can vary based on the specific type of policy you want, including the kind of consumer credit it would cover and the loan amount. Risks are higher for the policy issuer because the loan is being insured, not the borrower.According to one state government source, on a four-year $15,000 car loan (the example is using an interest rate of 9%), a credit life insurance policy would cost around $294 with disability insurance coming in at $432.

What Is the Benefit of Having Loan Insurance? 

The key benefit is peace of mind. Depending on what kind of insurance you’d buy, you’ll have coverage in case an unwanted triggering event occurs—whether that’s losing your job or becoming disabled—or, as a worst case scenario, dying before the loan is paid off. Plus, because you’re able to keep up payments if unemployed or disabled, this protects your credit score—which in turn will position you more effectively when in need of a loan in the future. Finally, plenty of people qualify for this type of coverage, making it less likely that you’d be turned down.

What Are the Risks of Having Loan Protection? 

First, although it may be easier to qualify for this type of protection, there are reasons why people’s applications get rejected. As for risk levels, make sure that you choose a reputable insurance company and then read and understand the parameters of your policy before signing. Plus, other types of policies (such as traditional life insurance or a company-sponsored long-term disability plan) may come at a better price point—and personal loan insurance policies come with short terms. This isn’t a long-term solution. 

Common Reasons for Being Refused Loan Protection

Reasons can include:
  • Part-time employment
  • Short-term employment
  • Pre-existing medical conditions
  • Can only work your current job
  • Self-employment

Part-Time Employment 

It isn’t unusual for a policy issuer to require that an applicant works at least 16 hours a week with a contract that’s long term. If so, employment that’s too part time or doesn’t come with some assurance of ongoing work may lead to a rejection.

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. 

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.

Can Only Work Your Current Job 

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.


If 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.

Is Loan Protection Insurance Mandatory?

No. These are optional types of policies, ones that you can consider as a form of protection if you aren’t able to make personal loan payments for a qualifying reason.

Personal Loan Resources 

If you’re in need of a flexible form of funding, here’s information about unsecured loans for personal use. More specifically here are insights into personal loans with no credit check. If you’ve already got a personal loan and you’d like to explore better options, here’s how to refinance a personal loan along with info about current interest rates for personal loans.

The Takeaway

Personal 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. There are pros and cons to this type of insurance. It’s by no means a requirement for getting a loan.Here, you can compare personal loan rates

Frequently Asked Questions

What is loan protection insurance?
Is loan protection insurance mandatory?
What is the benefit of loan insurance?
Photo credit: iStock/Vertigo3d

About the Author

Kelly Boyer Sagert

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.
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