Credit Insurance

Credit Insurance in a Loan or Mortgage

When purchasing a personal loan or mortgage, it is sometimes asked whether the buyer also wants credit insurance. Credit insurance may also be included in the loan. Credit insurance works by protecting the loan in the case that the individual cannot make payments. Most of the time, credit insurance is just optional and does not have to be purchased from the lender. According to the Federal Trade Commission, it is illegal for a lender to try to include credit insurance deceptively in a loan.

There are four main categories of credit insurance:

• Credit life insurance that can pay off either a portion or the entire amount of the loan in case the buyer dies.

• Credit disability insurance which is also called health and accident insurance, which will take over the payments for the loan in the case the buyer becomes injured or sick and is unable to work.

• Involuntary unemployment insurance which is also called involuntary loss of income which can make payments on a loan if the buyer loses his or her job and is not his or her fault, for example due to a layoff.

• Credit property insurance can protect personal property that is often used to secure a loan if the property is destroyed by any events such as accident, theft, or natural disasters.Before deciding to have credit insurance for a loan from a lender, it is important to think about just what is necessary, whether there are any other options available, and the rates on the credit insurance. Sometimes credit insurance may not be necessary, or when some form of insurance is needed, an alternative policy may be more suitable.

Important questions to ask about the policy include:

• How much will the premium be?

• Is the premium financed as a part of the loan? Will the credit insurance increase the loan and will that lead to more interest?

• Can it be paid monthly rather than financing the whole premium?

• What is the difference in the loan payment without and with the credit insurance?

• Can the insurance cover the entire length of the loan along with entire amount of the loan?

• What are the exclusions and limits on the payment of benefits (what is and is not covered)?

• Is there any waiting period prior to the coverage becoming effective?

• If there is a co-borrower, what kind of coverage will that individual have and what will it cost?

• Is it possible to cancel the insurance policy? If possible, what is the refund policy?

Before signing loan papers, make sure to ask the lender about whether the loan includes voluntary credit insurance charges. It is important to inform the lender if credit insurance is not desired.