Loan Protection Insurances Are Becoming More Common
Since the onset of the COVID-19 pandemic, the world has felt a strong sense of uncertainty about the future. Throughout the pandemic, people have grown more aware of the unpredictability of various aspects of life, including jobs, health, and steady income.
With all these changes, loan protection insurance has become increasingly popular, as people seek out greater protection and peace of mind in case of an unexpected event.
So what is loan protection insurance, and how do you know if it’s the right plan for you?
Loan Protection Insurance Overview
Loan protection insurance is an option you can use to protect you and your family when dealing with illness, severe accidents, job loss, or in the case of the borrower’s death.
This form of income protection ensures that if you’re unable to make monthly payments for various reasons, those payments will be covered.
How Does Loan Protection Insurance Work?
When applying for a loan, the bank representative might offer you the option to enroll in loan protection insurance.
While the specifics of loan protection policies vary from plan to plan, loan protection insurance is designed to prevent you and your family from defaulting on debt repayment if the borrower cannot make monthly payments.
Loan protection insurance offers a range of different coverage and plan types.
Typical loan protection insurances are:
Life insurance coverage: If the borrower passes away from an accident or illness, the insurer will take care of debt repayments instead of the obligation falling on the family
Temporary disability coverage: If the borrower is sick or injured, the insurer will continue to make monthly loan payments based on the chosen policy
Severe health employment coverage: The insurer will pay all of or part of the loan in the case of a significant health diagnosis
Unemployment coverage: The insurer covers loan payments during a period of unemployment if it is caused by factors outside the borrower’s control.
Specifics of loan protection insurance policies differ based on the plan you choose, so be sure to look at the included conditions and requirements.
While opting into loan protection insurance isn’t required by lenders when applying for a loan, it can provide additional comfort and a feeling of security knowing you and your family can avoid significant financial burden in the event of unexpected unemployment, accident, or sickness.
Loan Protection Insurance Cost
The cost of a loan protection insurance plan is determined by a range of factors, including age, chosen coverage plan, loan balance, and payment amount.
Loan protection insurance plans purchased for closed-ended loans generally include a predetermined one-time fee. However, on open-ended loans such as a credit card, you’re likely to pay a monthly fee and premium based on the amount you owe.
These loan protection premiums can significantly decrease the value of the insurance throughout your lifetime. For example, in 2009, the annual cost of loan protection reached more than 10% of consumers’ average monthly balance.
If you’re considering purchasing loan protection insurance, it’s essential to look at the specific conditions of the plan and the loan balance to help you calculate the cost. Term life insurance is often less costly with more stable payments, and because open-ended loans often fluctuate and lead to higher premiums, it’s often worth comparing the cost of the two options to decide which one is the best for you.
Loan Protection Insurance with Other Types of Loans
Loan protection insurance applies to a range of different types of loans, including personal, mortgage, and business loans.
Through purchasing mortgage protection insurance, borrowers can ensure any outstanding mortgage payments are taken care of in case of death. If an insured consumer dies, insurance funds will go directly to the lender to pay off debt. Because a home loan is a closed-ended loan, most mortgage protection insurance plans typically include fixed, predetermined payments.
When a business owner takes out a loan to start or expand their company, they can also purchase business loan protection. Business loan protection plans usually cover venture capital loans, commercial loans or mortgages, director’s loans, or personal guarantees. If a business owner suffers from an illness, accident, or death, this insurance pays for the remaining balance on the business loan.
Who Offers Loan Protection Insurance?
Loan protection insurance isn’t just offered by financial organizations and other lending institutions. Private insurance companies can also offer this loan protection to borrowers.
Benefits and Drawbacks of Loan Insurance Protection
If you have any debt, from credit cards to a home loan to a personal loan, loan protection insurance can provide a significant sense of comfort and assurance that you and your family will be taken care of in the event of sickness, accidents, or unemployment.
This relief from financial burden during difficult times is one of the major draws of loan protection. Along with this comfort, having a loan protection policy ensures your credit score doesn’t suffer if you’re unable to pay your bills, preventing even more long-term financial stress and barriers.
However, you should always carefully consider the costs and drawbacks of loan insurance protection. Oftentimes, other life insurance policies can be cheaper and more expansive, particularly if you’re dealing with a fluctuating loan balance that could drive up premium costs.
Make sure to compare all your financial options before deciding on the best choice for you.
Is Loan Protection Insurance a Good Choice for You?
Anyone taking out a loan should carefully consider loan protection insurance ‒ particularly against term life insurance and disability policies ‒ to determine if it’s the right option for them.
Loan protection insurance is usually available for people ages 18-55 years old who are employed and work a set number of hours per week specified in individual policies. Every policy has unique requirements, so if you’re applying for a loan, it’s crucial to look into the individual loan protection plans.
And while disability or term life insurance plans are often a cheaper and more appealing choice, loan protection insurance is a fantastic alternative for anyone who doesn’t qualify for these policies.
With all the uncertainty in the past few years, loan protection insurance is a great option to ensure you and your family are covered no matter what happens.