A personal loan can help you reach a variety of financial goals, from consolidating debt to renovating your home and more. But like any loan, a personal loan is also a major commitment. In this case, you’re committing to making a certain monthly payment until the loan is fully repaid.
But what happens if there’s a financial emergency — unemployment, disability, or even death — before you’re able to pay off the loan? For those situations, there is a tool called credit insurance, which can repay your loan so you don’t have an unpaid debt hanging over your head or leave it for your loved ones to pay.
What Is Credit Insurance?
Credit insurance is an insurance policy that will pay off some or all of your debts in the event of certain emergencies. There are several types of credit insurance you could purchase for a personal loan or any other type of debt.
Credit Unemployment Insurance
This type of insurance applies if you’ve lost your job involuntarily (meaning you’ve been fired or laid off, but not if you’ve quit). Credit unemployment insurance may cover your personal loan or debt consolidation loan payments only temporarily until you have a new job and can take them over again.
Credit Disability Insurance
This type of insurance will pay off part of all of your debt if you become disabled. Some credit disability insurance policies may temporarily cover your payments until you’re back on your feet, while others may pay off the full balance if you’re permanently disabled.
Credit Life Insurance
This type of insurance will pay some or all of your remaining debt balance if you pass away before you’re able to repay it. Each policy has a certain coverage limit, so whether your loan will be fully paid off depends on your loan balance and coverage amount.
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How Does Credit Insurance Help You?
Credit insurance is designed to pay your debts, either temporarily or in full, due to certain emergencies. This type of insurance can help both you and your family.
First, in cases of disability or unemployment, you’re already facing a financial setback. And being unable to make your loan payments can hurt your finances even more.
For example, if you aren’t able to make your payments, your missed payments will be reported to the credit bureaus and could damage your credit score. And depending on how long you can’t pay, your loans could even go into default, which would hurt your credit even more.
Credit insurance can also help your family. If you pass away unexpectedly, your family would have to repay your debts with your remaining assets. If you have credit insurance, the insurance company would cover the debt instead.
In all cases, credit insurance can also help to relieve stress. In most cases, your credit insurance will make payments directly to your creditors rather than to you to pass along. As a result, you don’t have to worry about those payments at all.
How Much Does It Cost?
The cost of credit insurance depends on many factors, including the type of credit insurance, the amount of coverage, where you live, and other factors.
The typical cost of debt protection insurance ranges from $0.85 to $1.35 per month per $100 of debt, according to the United States Government Accountability Office. Of course, this number may not be spot on.
First, this data is from 2011, but it’s the most recent year we have data from. Additionally, the GAO is describing the cost of debt protection insurance offered by credit card issuers, which could differ from other credit insurance products.
However, if we use this math, you can assume that the monthly cost of credit insurance on a $10,000 personal loan would range from $85 to $135.
Who Should Consider It? Who Is It Best For?
Credit insurance might be right for you if you have significant debt and are concerned about being unable to pay it due to disability or unemployment or if you’re concerned about passing away and leaving the debt for your loved ones to pay off with your assets.
That being said, credit insurance isn’t necessarily or a good idea for everyone. First, credit insurance can be relatively expensive. In fact, you could end up paying nearly as much in credit insurance each month as you pay toward your actual debt.
Additionally, there are other types of insurance — and more affordable ones at that — that can take the place of credit insurance. We’ll talk more about those options below, but other types of insurance can serve the same purpose for a lower cost.
Weighing the Pros and Cons: What to Consider
To help you decide whether credit insurance is right for you, check out some of the main pros and cons.
Credit Insurance Alternatives
Credit insurance can help repay your debts in the event of unemployment, disability, or death. But there are plenty of alternatives that would accomplish the same goal and cost far less than credit insurance. Here are a few examples:
Emergency Fund
If you lose your job or don’t have income for some other reason, a well-funded emergency fund can help you make your debt payments, as well as pay your other bills. Try to save between three and six months of expenses in your emergency fund.
Unemployment Benefits
Depending on how you became unemployed, you may qualify for unemployment benefits in your state. While these benefits are often slightly less than your previous income, they can replace at least a portion of it and help you meet your financial obligations until you find a new job.
Loan with Unemployment Protection
There are certain personal loan lenders that offer unemployment protection, meaning they will temporarily pause your payments after an involuntary job loss. It generally won’t hurt your credit but will probably cost you more in interest in the long run.
Disability Insurance
This insurance provides a recurring source of income if you become disabled. Some disability insurance policies are intended for short-term use, while others can be used for the long term (possibly until you reach retirement age).
Life Insurance
Term life insurance provides a lump sum to your beneficiaries if you pass away. If you have remaining debt, your loved ones can use your life insurance to pay it off. If you have loved ones who rely on your income, be sure to purchase enough coverage to both pay off your debts and take care of your family moving forward.
Bottom Line
Credit insurance can provide peace of mind when you take out a personal loan since you’ll know that even if emergency strikes, you or your loved ones will be able to repay the loan.
But this type of insurance can be expensive and isn’t necessary for everyone, especially those that have an emergency fund or other insurance policies in place.
Frequently Asked Questions
No, credit insurance isn’t required to get a personal loan. You may purchase it to protect yourself and your family in case something happens, but you can also rely on life insurance, disability insurance, emergency fund, and other alternatives.
Credit life insurance can be expensive. It can add a significant cost to your loan and is often more expensive than life insurance or disability insurance.
Yes, like any other insurance policy, you can cancel the credit insurance on your personal loan at any time. Keep in mind that if you cancel, you won’t have coverage in the event of an emergency, nor will you be able to recover the premiums you’ve already paid.
