In addition to insuring physical objects, like a house or car, it’s also possible to insure financial products, like a loan.
Personal loan insurance can provide peace of mind — and protect your credit — if something happens, and you’re suddenly unable to fulfill the requirements of your loan agreement.
How personal loan insurance works
Personal loan insurance is an optional financial product that provides coverage in certain situations that may prevent you from paying back your personal loan.
For example, if you lose your job, are in a car accident, are hospitalized with a serious illness, or pass away, personal loan insurance can ensure your debts are paid.
Personal loan insurance isn’t mandatory, but you’ll generally have the option to purchase coverage during the loan approval process.
What events does personal loan insurance typically cover?
- Job loss.
Each loan insurance policy is different, so it’s important to read the small print and ask questions. For example, pre-existing illness, part-time work or contract work may not be covered.
Nerdy tip: Personal loan insurance policies that provide payoff coverage in the event of death may be separate from those that provide monthly payment coverage in the event of job loss or illness. If you want coverage in both scenarios, you’ll need to purchase two separate insurance products.
Who should consider personal loan insurance?
Personal loan insurance can be quite expensive and isn’t necessary for everyone. If you’re borrowing a fairly small amount of money, are healthy and have stable employment, personal loan insurance may not be worth the added cost.
However, in some circumstances, loan insurance might provide peach of mind, and be a cheaper alternative to other types of individual insurance.
You will need to compare and evaluate your needs to see if personal loan insurance is worth it for you. Make sure to understand:
- The maximum benefit (the most the policy will pay).
- What illnesses are covered.
- What disabilities are covered.
- Whether the policy covers your particular type of employment.
- Conditions under which you may lose your coverage.
Pros and cons of personal loan insurance
- Can prevent loan default in cases of job loss or illness.
- Prevents your family from having to assume your debt, should you pass away.
- May be expensive.
- May not cover pre-existing illness.
- May not cover some types of work (self-employment, freelance, part-time, etc.).
How much does personal loan insurance cost?
The amount you’ll pay for personal loan insurance varies depending on your personal needs and financial health.
Some of the factors that lenders consider when figuring out what to charge for a personal loan insurance policy include:
- The amount of your personal loan.
- How much time you need to pay off your personal loan.
- Your age, gender and physical health.
How to buy personal loan insurance
Personal loan insurance can be purchased at the banks, credit unions, and caisse populaires that offer personal loans.
Chances are your lender will discuss the product without you having to even ask, as many banks and financial institutions encourage it. However, they cannot charge you for personal loan insurance without your consent.
If you agree to buy personal loan insurance, you must complete a separate agreement.
If your insurance is provided by a federally-regulated institution they must also provide you with the term of the agreement, a description of the product including when it starts and how to use it, information about how you will be charged for the insurance product, and any conditions required to cancel the product.
Personal loan insurance products are not sold by licensed insurance representatives, they’re sold by banks and other personal loan providers. As such, it is up to you to ensure that the coverage offered will provide sufficient coverage based on your employment and health.
How to pay for personal loan insurance
You’ll typically have two ways to pay for personal loan insurance:
- Pay for it upfront at the time of the application.
- Pay a recurring fee as part of your monthly loan payments.
DIVE EVEN DEEPER
Personal loans are available from banks, credit unions, and alternative lenders. The best place to apply for a personal loan depends on your budget and credit score.