If you've financed a large purchase such as a car, boat, RV, or furniture, credit insurance will pay your lender in certain situations that prevent you from making your payments. So, depending on the policy, if you were to pass away, get laid off, or become unable to work due to a disability that prevents you from making your scheduled loan payments, credit insurance can repay the loan by making payments to your lender on your behalf.
If you're wondering if credit insurance is right for you, here are a few things you need to know before buying a policy:
- The coverage is optional. Since it's not required, you have the option of accepting or declining coverage. The choice is up to you.
- The lender is the beneficiary, not you or your family. So in the event of a claim, the credit insurance benefits are first paid to the lender, and any excess benefit will be paid to you.
- Generally, the credit insurance benefit decreases as your loan balance decreases. Check with your lender as to the terms of your policy.
- Unlike most life insurance policies, a medical exam is typically not required for credit life policies.
- It may be more cost effective to buy a small life insurance policy as opposed to a credit life or credit disability policy. However, factors such as your loan amount, type of credit, and type of policy will all determine how much you'll pay.
- Typically you'll be offered credit insurance at the institution where you obtain your loan.
- Typically, you have options for paying your premiums in either monthly installments or a single premium installment. If you go the monthly route, you'll receive a bill every month. If you select the single-premium option, the cost of the policy will get added to your principal and financed with your loan. That means you don't have to write a check for the credit insurance but you could be paying interest on those premiums.
There are four types of credit insurance:
- Credit life — Pays off all or some of your loan if you were to die.
- Credit disability — Pays a limited number of monthly payments if you were to become disabled, couldn't work, and were unable to make your payments.
- Credit involuntary unemployment — Pays a specified number of monthly loan payments if you're laid off from your job.
- Credit property — Protects the personal property used to secure a loan if it's destroyed during the term of the coverage.