It’s extremely common to take out a loan to make a large purchase, or use a credit card for charging smaller everyday items. Occasionally, unforeseen circumstances or financial difficulties can put you in peril of defaulting on your monthly payment. Is there any way to guard against the possibility that you won't be able to make your payment in the future? Read on to learn more about credit insurance.
How Credit Insurance Works
Credit insurance is debt cancellation coverage that is sold by lenders, including banks, credit unions, auto dealers, and finance companies. When you take out a loan, or when you use a credit card, you have the option of purchasing credit insurance. In the event of your death, disability, or another triggering event, the credit insurance will make your monthly payments directly to the creditor on your behalf.
Sometimes, credit insurance is included in a loan proposal. However, credit insurance is always voluntary, and under no circumstances can you be forced to purchase it from a lender. In fact, the Federal Trade Commission (FTC) has stated that that it's illegal for a lender to deceptively include insurance or other optional products in your loan without your knowledge or permission.
Credit insurance can offer you peace of mind, but depending on your circumstances the premiums may not justify the possible payout. The same sort of protections offered by credit insurance can also be provided through life insurance and disability insurance policies, so when shopping for insurance, consider exploring those sorts of policies as well.
Types of Credit Insurance
The types of credit insurance that will be right for you depends in large part on the type of risk that you are trying to guard against. The most common types of credit insurance are:
- Credit life insurance: This coverage repays some or all of your loan if you die.
- Credit disability insurance: This type of policy will make your payment if you can't work due to an illness or injury.
- Involuntary unemployment insurance: If you experience an involuntary loss of income through no fault of your own (for example, if you are laid off), this policy will make your loan payments until you are back on your feet.
- Credit property insurance: This type of insurance protects any personal property used to secure a loan if it destroyed by an event such as theft, accident, or natural disaster.
Types of Credit Insurance Premiums
The amount of your credit insurance premium will depend on various factors, including the amount of the loan or debt, the type of credit, and the type of policy. Premiums can either be paid using the single premium method or the monthly outstanding balance method.
Single Premium Method
With this method, your premium is calculated at the time you take out your loan, and is added to the total amount of the loan. You become responsible for the entire premium at the time that you purchase the policy. Your monthly loan payment breakdown will include a portion of the initial loan, a portion of the insurance premium, and the interest charge for the month.
Monthly Outstanding Balance Method
This method of payment is typically used for credit cards, revolving home equity loans, or similar debts where the amount of debt may increase over time. Given the variable nature of the debt, the premium for that particular month's debt is based on either the end-of-the-month balance or an average daily balance.
Get Legal Help with Credit Insurance
If you are considering a major purchase and want the protection of credit insurance, there are many issues to consider. Unfortunately, sometimes disputes can arise with your insurance company about the amount of your premium or the extent of your coverage. If you are in a dispute with your insurance company or have legal questions about credit insurance, you may want to talk to a lawyer about your options. FindLaw can help you find an experienced insurance attorney in your area.