If you have one or more credit cards or installment loans, or you are planning on taking out a new loan like a mortgage or car loan, you may want to consider investing in either credit insurance or debt protection.
While these financial products may seem similar, they actually have some significant differences, which can make one or the other a better choice in your own particular situation. Curious to learn more? In this article, we’ll discuss everything you need to know about the differences between credit insurance and debt protection.
NOTE: This information is purely informative, and not intended to be financial advice. Consider your own particular situation and financial means before taking out any kind of loan or insurance policy.
Credit Insurance – Covering Your Loans In Unexpected Situations
Consumer credit insurance is typically offered by life insurance companies. However, in some cases, it can be offered directly by a credit card company or another loan company. It comes in three common forms, each of which is distinct and has a different purpose;
- Credit life insurance – This type of credit insurance covers the repayment of your outstanding debt, should you die unexpectedly. If you die, the debt will be cancelled altogether, and neither you nor any family members will be responsible for any additional payments on the debt. You will usually need to prove the death of the policyholder by providing a death certificate and other official documentation.
- Credit disability insurance – This type of insurance helps cover the cost of your loan if you become disabled and cannot work. Usually, there is a waiting period of between 14-30 days before this insurance kicks in – during this time, you’re still responsible for making payments. In some cases, though, the benefit will be retroactive, so you may be compensated for these payments, if you’re still disabled after the waiting period has ended.In most cases, the money you will receive will be equal to the loan’s minimum monthly payment. However, this benefit will not be paid to you. Rather, it is paid directly to the lender – this means you can’t actually access this cash. It’s paid on your behalf to the holder of the debt, preventing you from defaulting.
- Credit unemployment insurance –Similar to credit disability insurance, this type of insurance covers the minimum monthly payments on your debt, should you become involuntarily unemployed, and have difficulty finding new work in a timely manner. In most cases, you’ll have a 30 day waiting period before benefits begin to kick in. Again, some policies are retroactive, so after the waiting period, you may be compensated for the previous month’s payment.
This type of insurance is most commonly offered as a part of a mortgage, credit card, or a personal loan – and provided at the time that the credit contract is approved. However, some lenders do allow this type of insurance to be offered later.
It’s important to note that, in many cases, credit insurance policies have a maximum number of payment instalments – after which coverage ceases. There may also be a lifetime payment limit. If you hit this limit, no more payments will be made on your behalf. In addition, credit insurance may not cover the entire amount of a debt.
Consider a credit card, for example. If you become disabled, your credit insurance will make minimum payments on your debt – and it will continue to collect interest and grow, as long as minimum payments are being made.
Make sure you read the fine print when signing up for credit insurance, to make sure that the policy makes sense for your situation, and is a good financial choice.
Debt Protection – It’s Not Insurance, But It’s Similar
Debt protection is usually priced differently than credit protection, and it’s only issued by the holder of a loan. It’s a common feature on many major credit cards – other terms used to refer to debt protection include “payment protection” or “debt cancelation.”
If you opt for debt protection on a credit card, you’ll be charged a monthly fee, based on a percentage of your balance at the end of the month.
Like credit insurance, your minimum payments will be covered if you have a qualifying event – often job loss or medical disability. In some cases, the balance may be completely eliminated under specific circumstances, such as the death of the debtor.
It’s important to note that there are often more exclusions and other issues with eligibility, which are not always disclosed when you sign up for debt protection. Seasonal or part-time work, self-employment, are often excluded from job-loss benefits.
It may also be difficult to have your claim processed and approved. Debt protection is not an insurance product, so the companies who issue this benefit have much more flexibility and leeway when designing their programs, which can result in difficulties in claim processing.
If you do sign up for a debt protection program, it is very important to read through the terms and conditions before you sign up. You will want to understand exactly what benefits you’ll receive, the conditions and terms of the agreement, and any exclusions that may face you. You should also check the price to make sure that it’s reasonable – in many cases, the cost of debt protection may be much higher, compared to credit insurance.
Make The Right Choice For Your Financial Future – And Stay Covered!
At Niche Trade Credit, we’re experts when it comes to insurance. So we encourage you to explore your options for credit insurance and debt protection – as well as other insurance instruments like life insurance – to make sure that your financial future is protected, and you’re covered in case of unexpected life events such as sudden death, disability and sickness, and loss of work.
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