Credit Insurance: Definition, Purpose, Types, and Drawbacks

What is Credit Insurance?

Credit insurance is a type of insurance policy purchased by a borrower that pays off one or more existing debts in the event of a death, disability, or in rare cases, unemployment.

Credit insurance is marketed most often as a credit card feature, with the monthly cost charging a low percentage of the card's unpaid balance.

How Does Credit Insurance Work?

Credit insurance can be a financial lifesaver in the event of certain catastrophes. However, many credit insurance policies are overpriced relative to their benefits, as well as loaded with fine print that can make it hard to collect.

Key Takeaways

  • There are three kinds of credit insurance—disability, life, and unemployment—available to credit card customers.
    Credit insurance is an optional feature of a credit card, and you don't have to purchase it.
  • It may be wise to consider if the other insurance you have in place is sufficient enough without purchasing credit insurance. 
  • Credit insurance may act as a safety net for credit card owners in tough economic times.

If you feel that credit insurance would bring you peace of mind, be sure to read the fine print and compare your quote against a standard term life insurance policy.

Three Types of Credit Insurance

There are three types of credit insurance, each paying its benefit in different ways:

Credit Life Insurance

This type of life insurance pays off all outstanding loans and debts if you die.

Credit Disability Insurance

Also called accident and health insurance, this type of credit insurance pays a monthly benefit directly to a lender equal to the loan’s minimum monthly payment if you become disabled.

For some credit card holders, credit insurance may be a costly feature in comparison to its benefits.

You must be disabled for a certain amount of time before a benefit is paid. In some situations, the benefit is retroactive to the first day of disability. In other cases, a benefit may begin only after a waiting period is satisfied. Common waiting periods for credit disability insurance are 14 days and 30 days.

Credit Unemployment Insurance

With this type of insurance, if you become involuntarily unemployed, this insurance pays a monthly benefit directly to the lender equal to a loan’s minimum monthly payment. 

You must remain unemployed for a certain number of days before a benefit is paid. In some cases, the benefit is retroactive to the first day of unemployment. In other cases, the benefit begins only after the waiting period is satisfied.

8 Questions to Consider Before Purchasing Credit Insurance

  • Do you have other insurance or assets that would cover debt obligations in the event of my death, disability, or unemployment?
  • Would it be better to buy a life insurance policy or a disability insurance policy? Credit insurance may cost more than other more traditional insurance options.
  • If you purchase single premium coverage, will the premium be financed as part of the loan? If so, how much will the loan payment increase due to the cost of the credit insurance?
  • Will the credit insurance cover the full term of the loan and the entire balance?
  • How long is the waiting period for the monthly benefit to be paid?
  • What isn't covered by the policy?
  • Can the insurance company or lender cancel the insurance?
  • Can policy terms or premiums be changed without consent?
Article Sources
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  1. Maryland Insurance Administration. "What You Should Know Before You Purchase Credit Insurance." Accessed Oct. 20, 2021.