Loan protection insurance can be an ideal solution to protect yourself, and your finances, against economic emergencies. While no one wants to contemplate a future in which they are unable to take care of their monthly bills, loan protection insurance promises to help with specific loan repayments if you are unable to work due to disability or periods of unemployment. However, it is essential to understand the details of what loan protection insurance provides before deciding as to whether it is right for you.
What Is Loan Protection Insurance?
Most people make major purchases with the full expectation that they will be able to continue working and producing at their current or better income level for many years to come. Then the unexpected happens, and they are unable to work and earn income.
It could be an illness that requires a lengthy recovery and rehabilitation period. It could be a financial windstorm that leaves you, along with thousands, if not hundreds of thousands, of people out of work with no job prospects in sight. Loan protection insurance is designed to help you by providing financial support to help you repay your loans in these instances.
This type of protection is usually an optional coverage you can purchase when obtaining personal, auto or home loans.
How Does It Work?
In the case of mortgage protection, the insurance works by making your monthly mortgage payment on your behalf if you should become disabled through an illness or injury that renders you unable to work or if you are laid off from your job. Most plans have strict limits about how long you must have the policy in place before it will begin making payments for you as well as limits on how long the mortgage payments will continue.
The standard for most policies is that the plan needs to be in effect for 60 days before the protection goes into effect, with a limit of 24 total months of protection for the duration of the coverage. Most people can get back on their feet from a temporary setback or make other arrangements to pay their mortgages within a 24-month frame of time. However, one consideration in deciding whether a loan protection plan is right for you, is whether the 24-month window would provide the necessary payment coverage in the event of a deep and extended recession or lengthy illness.
How You Can Benefit: The Pros
The main benefit of loan protection insurance is the peace of mind it provides. The time-window for protection allows you to focus on treatment and recovery (or a job search if you are unemployed) rather than how you are going to keep a roof over your head in the coming months. That is the point of insurance, after all, to provide peace of mind to the insured and allow them the breathing room they need to focus on recovering from disasters without the added worry of potential financial devastation.
Not only can it help you keep making your mortgage, auto or personal loan payment while experiencing a significant illness, loan protection insurance also protects your credit score while you go through these devastating experiences as well. That can help you with negotiating power when you attempt to obtain favorable loan terms for other loans or credit cards. Had you not been able to continue making loan payments, you might receive less than optimal rates on new loans or suffer penalizing higher interest rates on outstanding credit card balances.
Finally, acceptance rates for this type of insurance protection are incredibly high, so most people don’t have to worry about being turned down because of your age, occupation, marital status, or other financial issues.
What to Look Out For: The Cons
It is not all sunshine and roses. Not only do you need to stick with reputable insurers for this type of insurance protection, but you also need to make sure you read and understand the fine print of your policy.
Common causes for refusals to pay out include:
- Working only part-time
- Pre-existing medical conditions rendering you unable to work
- Employment based on short-term contracts
- You are unable to work any job other than your current job
Some people find employer-sponsored long-term disability plans are better solutions to help them cover their costs and expenses during periods of unemployment due to illness or injury, though those aren’t effective for unemployment concerns.
You will need to compare policies, investigate companies offering coverage (and their records for denying claims), and choose your loan protection insurance policy wisely if this is the route you decide to go. There are no absolutes. Even companies with the best reputations may have policy shifts that err on the side of the company rather than the insured.
The Takeaway: Loan protection insurance fills a unique role with potentially substantial benefits, but there are downsides too. The key is to investigate thoroughly, understand your risks, and make informed decisions about the value of the coverage, should you have a prolonged health problem or period of unemployment.