When most people think of insurance, they think of health and life insurance coverage. But a growing number of consumers are turning to credit protection insurance. Commonly called payment protection, credit protection insurance is growing in popularity because of its affordability and flexibility.
What exactly is credit protection insurance? Credit protection coverage generally makes the minimum payments - typically 2- to 3-percent of the balance - on your personal loans, lines of credit and credit cards, in the case of unemployment or disability. And in the case of death, your account may be paid off in full.
Essentially, credit protection is designed to ensure your minimum payment obligations are met in the event your income is reduced or eliminated. If you become unable to work or if you die, credit protection can help keep your disability or death benefits from being consumed by debts.
Credit protection insurance comes in two main forms: credit disability and credit life insurance. Credit disability insurance makes your loan payments for you so you're guaranteed not to suffer a financial loss due to loan default if a disability interrupts your earnings. It can ensure payment of everything from auto to personal computer loans. Credit life assures your family isn't burdened with debt in the event of your unexpected death.
Credit protection coverage is usually offered by financial institutions in partnership with insurance companies. The cost of the insurance plan is financed as a part of the loan and gets added to the monthly loan balance.
"It's an optional product, and it's usually sold on each $100 of the account balance," explains Linda Sherry, director of national priorities for Consumer Action, a non-profit education and advocacy organization based in California. "The way it's sold on credit card applications is that it's framed as something that can protect the account holder's credit."
There are some important pros and cons to consider regarding credit protection insurance. On the positive side, no physical exam is required for coverage. Also, credit insurance offers you the flexibility to buy the exact amount of coverage needed to protect your loans. That means you can purchase a plan in small, conservative amounts. And coverage cost the same regardless of age, sex or occupation.
On the negative side, credit protection coverage is one of the most expensive types of insurance you can buy, according to Sherry. Plus, there are limits on how long the insurance will pay and what types of workers are covered - among other restrictions. For example, you can't claim for unemployment due to seasonal work, normal pregnancy/childbirth or elective surgery. "It has all kinds of limitations, so you need to read the fine print," Sherry advises.
So how do you determine if a credit protection plan is suitable for you? Think about your unique needs based on the various loan amounts you owe. Evaluate your current disability plan. Also, consider the fact that most employers pay only a fixed percentage of your salary for a limited amount of time. Does your current disability plan cover your monthly expenses, including your monthly debt maintenance payments? If not, credit protection insurance may make sense for you.
Next, ask yourself these essential questions:
• Who will pay your bills if you are unable to? Most people purchase credit insurance so their debts won't be a financial burden to their dependents.
• Is the new loan amount small enough that payments could be easily handled without credit insurance?
• If circumstances (such as disability) would cause you to be unable to work, would it be difficult or impossible to make the loan payments?
• Do you currently have enough savings and/or insurance to cover your needs? Experts recommend that a family of four maintain life insurance at about six to seven times their annual salary, or at a minimum of three times the yearly household income.
Bottom line, credit protection insurance may not the best option for everyone, but it is for many people and it certainly should be considered by anyone carrying a loan (home, auto, credit cards, personal, etc).
If you do find that credit protection isn't right for you, do yourself a favor and look for an alternative that is capable of providing the financial security you and your family will need in the event the unexpected does occur. "It's obviously not for anyone who can't live within the limitations on it," Sherry says. These people should consider other alternatives. Her advice: "If you have a lot of high balances on your credit cards, you should buy a small amount of term life or term disability."
Credit/payment protection coverage differs from ordinary insurance in a number of ways, including:
• There is no physical exam required
• You have the flexibility to purchase the exact amount of coverage needed to protect your loans
• Coverage can be purchased in small amounts
• It allows you to participate in group coverage
• The cost is financed as a part of the loan and is added to the monthly loan balance
• It cost the same regardless of age, sex or occupation