What is Credit Insurance and Do You Need It?
What is credit insurance? Keep reading to find out how credit insurance can provide financial support in the event of death, disability, or unemployment.
March 10, 2022
Once we hit adulthood, we rack up insurance policies a lot faster than we’d like to—such as health, dental, home, auto and life insurance. Which is why it’s always a bit surprising when an insurance policy you haven’t heard of pops up. Credit insurance isn’t the most popular policy out there, but it’s one that can provide you with financial protection under the right circumstances. What is credit insurance? Keep reading to find out.
Credit Insurance Definition
So, what is credit insurance exactly? Credit insurance is a type of insurance policy that can provide financial support when life throws you a curveball. A credit insurance policy can step in when unfortunate life events such as death, disability and unemployment make it difficult to make credit card, loan or other debt payments. Often, you’ll see credit insurance offered as a credit card feature – the credit card company charges a low monthly cost based on a percentage of the credit card’s unpaid balance.
While credit insurance policies can be really helpful, they can cost a lot more than they’re worth. Make sure you shop around for a policy that truly meets your needs before committing to one.
Types of Credit Insurance
There are a few different types of credit insurance for you to take into consideration.
Credit life insurance
A credit life insurance policy steps in to pay off any outstanding loans and debts you have in the event of your death.
Credit disability insurance
You may also hear credit disability insurance referred to as accident and health insurance. With this type of insurance, if you become disabled, the policy will pay out a monthly benefit (equal to the loan’s minimum monthly payment) directly to the lender you owe money to. Usually, you have to be disabled for a certain time period in order for this benefit to pay out. You may need to wait 14 to 30 days to receive your benefits.
Credit unemployment insurance
When it comes to credit unemployment insurance, this type of policy comes into play if you end up unemployed involuntarily. The insurance company will pay your loan’s minimum monthly payment directly to the lender if you become unemployed and remain unemployed for a certain amount of days.
Credit property insurance
If you have property that is destroyed or stolen and you have a credit property insurance policy, then you can receive reimbursement from the policy.
Do You Need Credit Insurance?
Your big question now is probably, do I really need credit insurance? That’s your call to make. If you have a loan you won’t be able to pay if life throws a curveball at you, then you may get peace of mind from a credit insurance policy that can help you make payments on your debt, helping you avoid late fees, high-interest charges and a damaged credit score.
That being said, some credit insurance policies are more helpful than others and it’s important to read the fine print on any policy you’re considering to see what limitations are attached and how useful it is. It’s worth noting that as you make progress towards paying off your debt, your credit insurance policy will decrease in value, so take your repayment timeline into account when making this decision.
Here’s what you should look out for when reviewing your policy options:
Will the insurance premium be added to your loan amount? This can result in a higher monthly payment and paying more in interest.
What is the maximum number of payments you need to make? Some credit disability and involuntary unemployment policies come with a maximum number of monthly payments. Do the math to make sure you won’t be paying for this insurance policy after you pay off your loan.
Can future claims be denied based on preexisting conditions and if so what conditions are those?
Can you cancel the insurance and get a full refund within a limited time?
Can you receive a partial refund if you cancel the policy or repay the loan early?
Do other insurance policies or assets that you already have cover your debt obligations if death, disability or unemployment make it so you couldn’t pay off your debt?
Would a life insurance or disability insurance policy be more cost effective than credit insurance? Hint: this is often the case.
Does the credit insurance policy cover the full term of the loan and the entire loan balance?
How long will you have to wait for the monthly benefit to be paid?
What isn't covered by the credit insurance policy?
Can the insurance company or lender cancel the insurance for any reason and at any time?
Can any policy terms or premiums be changed without the policy holder’s consent?
These are all things you should consider when evaluating your policy options.
Alternatives to Credit Insurance
If you have an alternative way to keep making your debt payments after a financially disruptive event, you may be better off doing that, as credit insurance can be expensive and hard to navigate.
These are a few alternatives to consider before taking out credit insurance:
Instead of paying a monthly premium for a credit insurance policy, each month you can put that money into an emergency fund that can help you cover a variety of expenses should you need financial assistance, instead of just covering a specific source of debt.
If you can’t work because you become sick or get injured because of your job, you might qualify for workers' compensation benefits. In many cases, workers automatically receive workers’ compensation benefits, but how much compensation you get depends on your injury and state laws.
If you become injured or ill and can’t work, disability insurance can replace part of your income. Before you buy a disability insurance policy, double check that your employer doesn’t offer a short-term or long-term policy as part of your benefit’s package.
If you lose your job involuntarily, then you may qualify for state unemployment benefits.
If you live in a community property state and are married, your spouse can inherit your debt, but other children or family members won’t. If you confirm your debt can legally pass to your spouse upon your death, then you may want to take out a life insurance policy that can cover the cost of the debt in the event of your death.
Want to pay off your credit card debt so you don’t have to worry about insuring it? Tally is ready to help!