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Credit Insurance: Do you really need credit insurance?

It is common for any lender of a mortgage loan or a personal loan, to ask the applicant whether credit insurance need to be purchased. Sometimes this credit insurance is part of the proposal for the loan. Many people may not really know what this credit insurance is.

Credit insurance protects the loan in case one is unable to make repayments due to certain reasons. Credit insurance is optional and one need not purchase this from the lender. In fact FTC has clearly stated that no lender can force a person to buy credit insurance or include in a loan without the knowledge of the person who is applying for the loan. There are 4 types of credit insurance: Credit Life Insurance, Credit disability insurance, Involuntary unemployment insurance and credit property insurance.

Credit Life insurance pays of all or some of the loan if the person dies before clearing the loan.

Credit disability insurance, also called accident and health insurance, makes payments on the outstanding loans if someone becomes seriously ill or injured and hence cannot work.

Involuntary unemployment insurance makes loan payments if someone loses job due to no fault of him or her. In other words, if someone is laid off the insurance makes payments towards the loan.

Credit property insurance protects personal property used to secure the loan if destroyed by events like theft, accident or natural disasters.

Before deciding to buy credit insurance from a lender, one should think of one’s options, needs and the rates of insurance. As happens in many cases, credit insurance may not be necessary at all, as other insurance from employer or personal insurance may cover some of these. Before deciding to buy credit insurance, one should answer some questions like below:

·         What would be the premium to be paid on the credit insurance?

·         Will the premium be financed as part of the loan?

·         Can the premium be paid monthly instead of financing the entire premium as part of the loan?

·         What would be the monthly payment without the credit insurance?

·         Will the insurance cover the loan for the entire period and the full loan amount?

·         What are the limits and exclusions on payment of benefits - that is, spell out exactly what's covered and what's not.

·         Is there a waiting period before the coverage becomes effective?

·         If a co-borrower also signs the loan, what coverage does he or she have and at what cost?

·         Can one cancel the insurance? If so, what would be cost of cancellation and what would be refunded?

It makes sense to purchase credit insurance given the uncertainties but one should weigh the pros and cons of such credit insurance. Most of the financial institutions provide advice and it is worth taking some inputs before finalizing to purchase credit insurance.