Is Loan Protection Insurance Right For You?
Loan protection insurance is designed to help policyholders by providing financial support in time of need. Whether the need is due to disability or unemployment, this insurance can help cover monthly loan payments and protect the insured from default. The loan protection policy has different terms depending on where it is offered. In Britain, it is often referred to as accident sickness insurance, unemployment insurance, redundancy insurance or premium protection insurance. These all provide very similar coverage. In the U.S. it is usually called payment protection insurance (PPI). The U.S. offers several forms of this insurance in conjunction with mortgages, personal loans or car loans.
How Does Loan Protection Insurance Work?
Loan protection insurance can help policyholders meet their monthly debts up to a predetermined amount. These policies offer short-term protection, providing coverage generally from 12 to 24 months, depending on the insurance company and policy. The benefits of the policy can be used to pay off personal loans, car loans or credit cards. Policies are for usually people ages 18-65 who are working at the time the policy is purchased. To qualify, the purchaser often has to be employed at least 16 hours a week on a long-term contract or be self-employed for a specified period of time.
There are two different types of loan protection insurance policies.
Standard Policy: This policy disregards the age, gender, occupation and smoking habits of the policyholder. The policyholder can decide what amount of coverage he or she wants. This type of policy is widely available through loan providers. It does not pay until after the initial 60-day exclusion period. Maximum coverage is 24 months. (For related reading, see: Layoff Protection Plans: Good Deal or Gimmick?)
Age-Related Policy: For this type of policy, the cost is determined by the age and amount of coverage the policyholder wants to have. This type of policy is only offered in Britain. Maximum coverage is for 12 months. Quotes might be less expensive if you are younger because, according to insurance providers, younger policyholders tend to make fewer claims.
Depending on the company you choose to provide your insurance, loan protection policies sometimes includes a death benefit. For either type of policy, the policyholder pays a monthly premium in return for the security of knowing that the policy will pay when the policyholder is unable to meet loan payments.
Insurance providers have different coverage start dates. Generally, an insured policyholder can submit a claim 30 to 90 days after continuous unemployment or incapacity from the date the policy began. The amount the coverage pays will depend on the insurance policy.
What Are the Costs?
The cost of payment protection insurance depends on where you live, the type of policy you select, whether it is standard or age-related, and how much coverage you would like to have. Loan protection insurance can be very expensive. If you have poor credit history, you might end up paying an even higher premium for coverage.
If you think this type of insurance is something you need, consider looking for a discount insurance group that offers this service. Premiums through large banks and lenders are generally higher than independent brokers, and the vast majority of policies are sold when a loan is taken out. You have the option to buy the insurance separately at a later date, which can save you hundreds of dollars. When buying a policy with a mortgage, credit card or any other type of loan, a lender can add the cost of the insurance to the loan and then charge interest on both, which could potentially double the cost of borrowing. Get the policy that best applies to your needs and current situation; otherwise you could end up paying more than you have to. (For related reading, see: Why You Don't Need Mortgage Protection Life Insurance.)
Pros and Cons of Having Loan Protection
Depending on how well you research the different policies, having a loan protection policy can pay off when you select a policy that is inexpensive and will provide coverage suitable for you.
In terms of credit score, having a loan protection insurance policy helps maintain your current credit score because the policy enables you to keep up-to-date with loan payments. By allowing you to continue paying your loans in times of financial crisis, your credit score is not affected.
Having this type of insurance does not necessarily help lower loan interest rates. When you shop for a policy, be leery of loan providers that try to make it seem like your loan interest will decrease if you also buy a payment protection insurance policy through them. What really happens in this case is the loan interest rate difference from the new "lower" rate is latched onto the loan protection policy, giving the illusion that your loan interest rate has decreased, when in fact the costs were just transferred to the loan protection insurance policy.
What to Look out for
It is important to point out that PPI coverage is not required to be approved for a loan. Some loan providers make you believe this, but you can definitely shop with an independent insurance provider rather than buy a payment protection plan from the company that originally provided the loan.
An insurance policy can contain many clauses and exclusions; you should review all of them before determining whether a particular policy is right for you. For those working full-time with employer benefits, you might not even need this type of insurance because many employees are covered through their jobs, which offer disability and sick pay for an average of six months.
When reviewing the clauses and policy exclusions, be sure you qualify for submitting claims. The last thing you want to have happen when the unexpected occurs is to discover you aren't qualified to submit a claim. Unfortunately, some unscrupulous companies sell polices to clients who don't even qualify. Always be well-informed before you sign a contract.
Make sure you know all the loan protection insurance terms, conditions and exclusions. If this information is on the insurer's website, print it out. If the information is not listed on the website, request that the provider fax, email or mail it to you before you sign up. Any ethical company is more than willing to do this for a prospective client. If the company hesitates in any way, move on to another provider.
Policies differ, so review the policy carefully. Some do not allow you to receive a payout under the following circumstances:
- If your job is part-time
- If you are self-employed
- If you can't work because of a pre-existing medical condition
- If you are only working on a short-term contract
- If you are incapable of working at any other job other than your current job
Understand which health-related issues are excluded from coverage. For example, because diseases are being diagnosed earlier, illnesses such as cancer, heart attack and stroke might not serve as a claim for the policyholder because they are not considered as critical as they would have been years ago when medical technology wasn't as advanced.
The Bottom Line
When searching for a loan or PPI, always thoroughly read the terms, conditions and exclusions of the policy before committing yourself. Look for a reputable company. One way is to contact the consumer advocacy facility where you live. A consumer advocacy group should be able to direct you to ethically responsible providers.
Review your particular financial situation in detail to make certain that getting a policy is the best approach for you. A loan protection policy does not necessarily fit everyone's situation. Determine why you might need it; see if you have other emergency sources of income through either savings from your job or other sources. Go through all exclusions and clauses. Will getting the insurance be cost-effective for you? Are you confident and comfortable with the company handling your policy? These are all issues that must be addressed before making such an important decision.
(For related reading, see: 15 Insurance Policies You Don't Need.)