What Is Credit Insurance?
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What is credit insurance?
Types of credit insurance
- Credit life insurance: Makes the remaining loan payments to the lender in the event of your death. These policies sometimes have a payout limit, which may be less than the outstanding loan balance.
- Credit involuntary unemployment insurance: Makes a limited number of monthly payments to the lender if you lose your job through no fault of your own. You’ll typically need to be unemployed for a certain amount of time (often 30 days) before this coverage kicks in.
- Credit disability insurance (also known as credit accident and health insurance): Makes a limited number of monthly payments to the lender if you become disabled or ill. Most policies require that you be out of work for a specified amount of time (like two weeks or 30 days) before they’ll make payments on your behalf. These contracts sometimes exclude pre-existing conditions, meaning the insurer can refuse to pay your claim if your disability is caused by a medical condition you were diagnosed with before buying the policy.
- Credit property insurance: Pays out if the property used as loan collateral is damaged, destroyed or stolen. This coverage is unique in that it doesn’t kick in if you become unable to make payments; instead, it’s the destruction or theft of the property that triggers the payout. Credit property insurance only protects your lender’s interest, not yours. Unlike the other three types of credit insurance, which are optional, lenders are allowed to require this coverage as a condition of the loan. However, you have the right to shop around instead of buying a policy directly from your lender.
How much does credit insurance cost?
- Single premium method. The premium is calculated upfront at the beginning of the loan. You’ll then pay interest on both the loan principal and the insurance premium.
- Monthly outstanding balance method. Your premium is automatically recalculated each month based on your outstanding balance. This method is more common for revolving credit, like credit cards, personal lines of credit and home equity lines of credit (HELOCs).
Is credit insurance required?
Alternatives to credit insurance
- Term life insurance. This type of life insurance provides a payout to your loved ones (not your creditors) if you die during the window in which the policy is in effect. Your survivors can then decide the best way to use those funds.
- Disability insurance. A disability policy can replace part of your income if you can’t work due to an illness or injury. Payments go to you, rather than your lender. You can decide whether that money goes toward your debts versus other expenses.
- Emergency savings. You could use the money you would have paid for credit insurance to build an emergency fund. Building up your savings can help you make payments during an income gap or unexpected shortfall.
- Lender hardship programs. Though they aren’t exactly an alternative to credit insurance, lender hardship programs may allow you to skip or reduce loan payments in some situations, like if you lose your job or become disabled. Approval is often granted on a case-by-case basis, but if you’re worried you wouldn’t be able to make your loan payments in an emergency, it’s worth checking with a potential lender about their policy.
Article sources
- 1. National Credit Union Administration. Payday Alternative Loans Final Rule. Accessed Apr 17, 2025.
- 2. National Bureau of Economic Research. Prodigals and Projecture: An Economic History of Usury Laws in the United States from Colonial Times to 1900. Accessed May 2, 2025.
- 3. Federal Register. Federal Interest Rate Authority: A Rule by the Federal Deposit Insurance Corporation on 07/22/2020. Accessed May 2, 2025.
- 4. Consumer Financial Protection Bureau. What Is a Debt Relief Program and How Do I Know if I Should Use One?. Accessed Jan 16, 2025.
- 5. Internal Revenue Service. Canceled debt – Is it taxable or not?. Accessed Apr 1, 2025.
- 6. Consumer Financial Protection Bureau. What is a payday loan?. Accessed Apr 17, 2025.
- 7. Federal Reserve. Military Lending Act. Accessed May 2, 2025.
- 8. Center for Responsible Lending. Unsafe Harbor: The Persistent Harms of High-Cost Installment Loans. Accessed May 2, 2025.
- 9. Consumer Financial Protection Bureau. What are the costs and fees for a payday loan?. Accessed Jun 6, 2025.
- 10. Center for Responsible Lending. Unsafe Harbor: The Persistent Harms of High-Cost Lending. Accessed Jun 6, 2025.
- 11. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Apr 8, 2025.
- 12. Internal Revenue Service. Retirement topics: Exceptions to tax on early distributions. Accessed Apr 8, 2025.
- 13. Administrative Office of the U.S. Courts. Bankruptcy Basics. Accessed Apr 8, 2025.
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