DEFINITION of 'Payment Protection Plan'

An optional service offered by some credit card companies and lenders that lets a customer stop making minimum monthly payments on a loan or credit card balance during a period of involuntary unemployment or disability or cancels the balance owed if the borrower passes away. Payment protection plans charge the customer a small, recurring monthly fee based on the amount borrowed and the conditions covered.

BREAKING DOWN 'Payment Protection Plan'

For example, a payment protection plan that covers loss of life, involuntary unemployment and disability might cost $0.35 per month for every $1,000 borrowed. If you signed up for this payment protection plan to cover your $20,000 automobile loan, your monthly fee would be calculated as ($20,000/$1,000) x $0.35 = $7.00.

Payment protection plans have eligibility requirements, conditions and exclusions that customers should ensure they understand before signing up. You don’t want to pay for protection month after month only to find out that your plan doesn’t cover a specific situation when you want to use your coverage. The fine print is available in the payment protection plan agreement and disclosures, which you should be able to access from the lender’s or creditor’s website.

Here’s an example of the conditions you might have to meet to take advantage of your payment protection plan’s coverage if you become disabled. You’ll have to be under a doctor’s care for an accident or injury that makes you unable to work in any job you’re qualified for, not just the job you normally work at. You’ll need to have been working for several months at the time you signed up for the payment protection plan, and your disability must have lasted for more than 30 consecutive days before payment protection will become active. If you qualify to take advantage of the coverage you’ve paid for, it will only last for a limited amount of time, such as 12 months, even if your disability extends beyond that period, and it will only cover a limited dollar amount specified in the agreement.

Because payment protection plans have so many conditions and exclusions, consumers may be better off foregoing these plans and putting the money they would have spent on them in an emergency fund instead. Another good use of the money would be to purchase long-term disability insurance and term life insurance, which are widely considered the best sources of financial assistance for individuals and their dependents in the event of disability or death.

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