If a big part of your debt is in credit cards or loans, you may be considering credit insurance. Think of it as an optional safety net. It’s useful in difficult situations, if those situations are included in the coverage. That’s why it’s important to read through the details of the insurance policy. Here, we break down what credit insurance is, how it works, and how to decide if you need it. Also, learn how to identify if the insurance product you’re considering makes sense for you.
What is credit insurance?
Credit insurance is a financial safety net for your credit products. It’s an optional insurance for credit cards or loans. In difficult situations, credit insurance can help your family pay off your credit cards or loans. It can help with the stress of situations like job loss, critical illness, accident, or death. It can give peace of mind, as long as it’s the right kind of coverage for you.
How does credit insurance work?
Lenders often offer credit card or loan insurance when they approve your credit card or loan application. You can also sign up for it later. It’s completely optional, and the lender will clarify this while offering the insurance to you. It’s a separate product, and you don’t have to take it if you don’t want to. Your loan or credit card approval does not depend on whether you sign up for credit insurance.
Credit insurance has many other names. It is also called creditor insurance, balance protection insurance, balance insurance, or debt insurance. Note that not all products offer the same type of insurance coverage. Ask your lender or service provider about what is covered in your policy. Make sure you have all the information before you sign up or provide confirmation.
If you do choose to go ahead with creditor insurance, know that creditor insurance can work in different ways. It depends on the type of outstanding balance one is looking to cover:
- Lump sum – In critical illness situations, one can have their debt paid off as a lump sum on the specific credit product that has credit protection added on. The debt is paid off up to the maximum amount specified in the Certificate of Insurance.
- Monthly payments – If one’s income is affected by job loss or disability, among other situations, credit insurance can also help with monthly payments towards insured debt. This is for a limited period of time, and also depends on the debt balance.
How to decide if you need a loan or credit insurance
There are some things to keep in mind before you sign up for credit or loan insurance. You need to understand the cost, coverage, and benefits offered. All this information will be in the Certificate of Insurance. You can ask your lender for a sample – they will often have a copy on their website, too.
Make note of the following points:
- If you’re eligible for coverage
- Cost of insurance
- Maximum benefit you’re eligible for
- Any criteria for exclusion or limitation
- When they’d release (and you’d receive) the insurance benefits
- If there are any limits on claims, claim amounts, and maximum age
- If you have other insurance coverage, check for conditions, overlaps, and any gaps that you need to be covered
If the offerings seem like they align with your needs, you can contact your insurance company for more information. They can answer any questions and clarify details on finer points. There may be some overlap in coverage with any other insurance you have, like life or health insurance.
When does it make sense to get this insurance?
Whether or not you need credit insurance will depend on your finances, income, and debt situation. For example, if you’re a single parent with two kids and have credit card debt, you might benefit from credit insurance. It can cover credit card debt even through loss of income. Similarly, a person working an unstable job, having heavy debt, or working small gigs may also benefit. Plus, someone working in an unstable industry, where work is project-based, occasional, or has varying schedules, may also have uneven wages.
These are some situations where credit insurance can be helpful. You must pay attention to the fine print and make sure the coverage they offer fits your needs.
How to get credit insurance?
You can usually get credit insurance via a lender, like a bank, credit union, or even a car dealership. Make sure the insurance meets your specific needs in terms of protection and coverage.
If your lender is a bank regulated by federal laws, they are bound to offer and sell products and services that are appropriate for you. Their rates would be based on your circumstances and finances. Due to this, they also must tell you if they’ve assessed that a product or service isn’t right for you.
Ask all your questions, clarify even minor points – it’s your money and your financial situation. Make sure you understand the product before you get it. Remember, credit insurance is optional. Federally regulated financial institutions can’t, and shouldn’t, pressure you about loan or credit insurance.
Credit or loan insurance premiums
When you sign up for credit or loan insurance, you will start paying premiums. This could either be a recurring premium or a one-time premium payment. If it’s a one-time premium, you’ll likely have to pay it at the time of loan approval. Typically, in this case, the premium amount just gets added to the total loan amount.
Recurring premiums are based on your initial loan amount, the amount of time it’ll take to pay off your loan, and other demographic information. If you’re applying for credit card balance insurance, they’ll also consider your average daily balance for the previous month or more.
Eligibility for credit or loan insurance
You can be eligible for credit or loan insurance if you’re between the ages of 18 and 65 (or 70 in some cases), and fill out a short health questionnaire. Depending on your answers, you may be approved right away. Sometimes, they need you to take a medical exam before approving you. You must provide accurate answers to the questionnaire, otherwise your insurance won’t be valid.
You could lose coverage if you go over your credit limit, owe payments past the due date, or have recent dishonoured payments.
Pros and cons
Here are some pros and cons of credit insurance to help you make a more informed decision.
Pros of credit insurance
- Helps protect your family
- Easy to sign up for
- Payments go straight to the lender. If your insurance does need to kick in, your insurer pays your bank directly.
- Some plans offer broad coverage and may be well-suited for your specific circumstances. It depends on your policy, so read the fine print and ask all the questions you need.
- Peace of mind if your coverage aligns with your needs
Cons of credit insurance
- It can be expensive. It tends to cost more than regular insurance for a similar kind of coverage. This is because it’s linked to a credit product.
- The fine print can also be a downfall. There are rules for what the insurance company will pay. There’s always a possibility of your claim being denied.
- Since the money goes directly to your lender for payment towards the insured credit product, you don’t have access to the money. If direct access to funds is important to you, credit insurance might not be the right fit.
- As you pay off your loan/debt, your insurance payout naturally gets smaller. However, your premiums may stay the same.
If you sign up without fully understanding the product, you may not be satisfied with what it provides and covers. It’s important to get clear information to avoid future stress.
Key takeaways
Credit insurance can help pay off credit card or loan debt in difficult situations. The kind of coverage you get varies greatly between products, so do your research. It is a completely optional product, so get it only if you think it will be a good fit for you. It’s easy to get, but it can be expensive and limited. Read all the details and the fine print before saying yes. It might be worth a look if the majority of your debt is in credit cards or loans. If you’re currently dealing with debt, you can contact one of our trained credit counsellors for advice – they can help you figure out which debt relief strategy could be the right fit for your specific situation.
