What is a 'Payment Protection Plan'

A payment protection plan is 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. It may also cancel the balance owed if the borrower dies. Payment protection plans charge the customer a small, recurring monthly fee based on the amount borrowed and the conditions covered.

For example, a payment protection plan that covers the loss of life, involuntary unemployment and disability might cost $0.35 per month for every $1,000 borrowed. For example, 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 divided by $1,000 multiplied by $0.35 = $7.00.

BREAKING DOWN 'Payment Protection Plan'

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 are some examples 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.
  • 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.

Other Forms of Payment Protection to Consider

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 to be the best sources of financial assistance for individuals and their dependents in the event of disability or death.

RELATED TERMS
  1. Down Payment

    A down payment is a type of payment made in cash during the onset ...
  2. Elderly and Disabled Credit

    The Elderly and Disabled Credit is a non-refundable tax credit ...
  3. Concurrent Periods

    Concurrent periods refers to specific points in time in which ...
  4. Advance Payment

    An advance payment is one that is made ahead of its normal schedule, ...
  5. Payment Shock

    A payment shock is the risk that the payments due on a loan will ...
  6. Payment Option ARM

    Under the terms of a payment option ARM, a borrower can make ...
Related Articles
  1. Insurance

    Protecting Your Income With Disability Insurance

    For a high-earning professional, income protection is essential. Here's what to look for in a disability insurance policy.
  2. Insurance

    Why Your Company Insurance Coverage Isn’t Enough

    Even if you have group life or disability insurance, it pays to have individual coverage too.
  3. Financial Advisor

    Disability and Business Overhead Coverage for the Self-Employed

    What every small business owner or professional needs to know about individual and business overhead disability income insurance plans.
  4. Insurance

    5 Things You Need to Know About Disability Insurance

    It's important to understand the true value of your ability to earn income, and to make sure it's protected.
  5. Managing Wealth

    Top 6 Features Of A Great Disability Policy

    Many people consider buying life insurance, but few think to prepare themselves from long-term illness or disability. Find out how to shop for disability insurance and protect yourself from financial ...
  6. Insurance

    Understanding Disability Insurance Policies

    Disability insurance is often overlooked because it is confusing. Here is some information to make it easier to understand.
  7. Insurance

    Group and Individual Disability Insurance: What You Need to Know

    What you need to know about group and individual disability income coverage.
  8. Insurance

    How to Protect Your Income No Matter What

    What does it mean to insure your income? Here are a variety of ways to do it and some insights into when it might make sense to invest in income insurance.
  9. Personal Finance

    Layoff Protection Plans: Good Deal Or Gimmick?

    If you get laid off, these plans can be of great value, but the best protection may be to avoid big purchases altogether.
  10. Financial Advisor

    How to Manage SS Disability & Retirement Benefits

    Advisors with clients who receive disability benefits can carve out a profitable niche by helping them integrate this income into a financial plan.
Trading Center