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Credit insurance policies are optional types of insurance that you may be able to buy when you take out a loan. Depending on the type of credit insurance, the policy may cover your personal loan payments—or repay the outstanding balance—if you lose your job, become disabled or pass away.
What Is Credit Insurance on a Personal Loan?
Credit insurance refers to several types of insurance policies that you can get with a personal loan:
- Credit disability insurance, also called credit accident and health or credit casualty insurance, can cover part or all your loan payments if you're ill, injured or become disabiled by a covered incident.
- Credit unemployment insurance, also called credit involuntary unemployment insurance, can make your monthly payments for a limited time if you lose a job involuntarily; for instance, if you're laid off (but not if you quit your job).
- Credit life insurance can pay off all or some of the remaining loan balance if you die unexpectedly.
You may need to apply and meet the eligibility requirements to qualify for each type of policy. For example, you might need to be working to qualify for credit unemployment insurance. And there may be a maximum age limit for credit disability or life insurance.
If you're taking out a secured loan, such as an auto loan, you might also be offered credit property insurance. This is a different type of credit insurance that can help cover loan payments if the property is stolen or destroyed. There are also some types of credit insurance available for credit cards.
Alternatively, a lender may offer you debt cancellation or suspension products. These can stop or eliminate your payments after a covered incident. But they may be covered by different regulations as they technically aren't a type of insurance.
Is Buying Credit Insurance a Good Idea?
A credit insurance policy can help prevent an unexpected event from impacting your loan payments. As a result, you might not have to pick and choose which bills to pay or worry about a missing loan payment resulting in late payments fees or damaged credit.
However, exceptions and limitations may limit the policies' usefulness. Review the fine print carefully and consider:
- The premium may be added to your loan amount, accrue interest and increase your monthly payment. Unless you're a member of the military, the extra cost might not be included in your loan's annual percentage rate (APR).
- Credit disability and involuntary unemployment policies may have a maximum number of monthly payments, which could be reached before your loan is paid off.
- After you file a claim, the credit insurance company will often make the payments directly to the lender.
- Your claim may be denied based on preexisting conditions.
- The potential benefit decreases as you pay off the loan.
- You may be able to cancel the insurance and get a full refund within a limited time. Or receive a partial refund if you cancel the policy or repay the loan early.
For personal loans, credit insurance is an optional add-on, and you generally need to purchase the policy when you first take out your loan. Consider the benefit and the cost, which can depend on where you live, the type of insurance and your personal loan amount.
If you're told you have to purchase the insurance from the lender to qualify for a loan, you can submit a complaint to your state attorney general, state insurance commissioner, the Consumer Financial Protection Bureau (CFPB) or the Federal Trade Commission (FTC).
What Are Some Alternatives to Credit Insurance?
Paying for credit insurance might not be a good idea if you already have benefits or savings that you can use to cover the loan payments in case of emergency. For example, you might not want to buy credit insurance if you have:
- An emergency fund: An accident or job loss are precisely the types of events that an emergency fund can help you get through. Try to save three to six months' worth of your necessary monthly household expenses, including loan payments.
- Workers' compensation: If you're injured or become sick because of your work, you may qualify for workers' compensation benefits—a benefit that you may automatically receive as an employee. The amount you'll receive may depend on the injury and your state's laws. At most, it may be two-thirds of your average weekly wages.
- Disability insurance: Disability insurance can replace part of your income if you're injured or ill and unable to work. You may receive short- and long-term disability insurance from your employer, or purchase the insurance on your own. The benefit amount and payment period can depend on your previous income and how much coverage you pay for.
- Unemployment benefits: If you lose your job involuntarily, you may be able to apply for unemployment through your state. Insurance benefits can vary widely depending on your previous income and state laws.
- Life insurance: Unpaid personal debts don't get passed on to children or family members, with the potential exception of a spouse if you live in a community property state. Look into life insurance if you're worried about how your death could impact others. A term life insurance policy might cost less and provide a larger benefit than credit insurance, especially for young and healthy applicants.
None of these options can completely replace your income if you're unable to work or lose your job. However, they may provide enough money to cover your loan payments and other monthly bills.
If you find yourself unable to afford payments, you can also reach out to your lender to ask if it has any hardship programs. Some lenders may work with you to temporarily pause or make your monthly payments more affordable.
Improve Your Credit to Qualify for Better Loan Offers
It may also be easier to manage your personal loan payments if you can qualify for a loan with a low monthly payment and low interest rate. Your credit score can be an important factor in determining lenders' offers. You can check your credit score for free with Experian. Using your account, you can also get insight into which factors are most impacting your credit and suggestions for how you may be able to increase your score.