What is Loan Insurance?

EPF Last Update: May 23, 2020

Offering peace of mind if you lose your job of find yourself physically unable to work, loan insurance protects against default by ensuring monthly payments on your mortgage, personal loan or credit card debt stays current. If we take home ownership for example, say you find yourself in the unenviable position of being disabled or unemployed. Instead of fretting over a possible foreclosure, your loan insurer will continue make your monthly mortgage payments and ensure your balance remains in good standing.

Most loan insurance plans provide short-term coverage – with duration ranging from 12 to 24 months. Polices are usually offered to borrowers age-18 to 64 and require at least 16 to 20 hours of weekly employment to qualify. Keep in mind though, if you’re over a certain age, you may not qualify for disability insurance.

Is Loan Insurance Worth it?

Answering this question depends heavily on the cost of coverage and the amount you receive. If you find a plan that offers transparent coverage at a reasonable price, loan insurance can be a great way to protect against events that are outside of your control.

Some positives include:

  • Protecting your credit score. When you purchase loan insurance, you never worry about missing a monthly payment. Thus, your credit score remains healthy regardless of any unforeseen circumstances.
  • Protecting your collateral. If you take out insurance against a secured loan, you eliminate the risk of losing your collateral if you can’t make a monthly payment.
  • Choosing your desired level of coverage. Rather than purchasing full coverage and paying a higher premium, you can opt for partial coverage and pay a lower premium. This flexibility is beneficial when you want to hedge a portion of your loan rather than the full amount.

Some negatives include:

  • Not everyone qualifies for loan insurance. If you are self-employed or work part-time, you may not qualify. Seasonal and casual employees usually don’t qualify as well. Loan insurers can also stipulate that you need to work for your employer for at least 12 months to qualify.
  • You may not actually need it. Many employers offer six months of short-term disability insurance to their employees. Because of this, you may already be covered.
  • Most policies exclude pre-existing conditions: If you have a pre-existing health issue that reappears and causes you to miss work, you many not receive any benefits.

How Much Does Loan Insurance Typically Cost?

Costs vary significantly depending on the type of loan you want to insure, the state in which you reside and whether you opt for full or partial coverage. Your credit score can help or hurt your case as well.

As a rough estimate:

  • Private mortgage insurance can cost 0.5% to 1% of a loans principal.
  • Personal and secured loan insurance can cost upwards of 15% of a loans principal.

Clearly, mortgage insurance is a much cheaper option, while insuring a personal loan comes at a hefty price.

What Should I Look for Within a Loan Insurance Policy?

Before opting into any plan, make sure you read the fine print. There have been examples of policyholders missing a loan payment, then proceeding to file the paperwork for the insurer cover the balance. However, the request was denied because the policy terms mandated that all claims must filed before a missed payment occurs. It’s little details like these that you need to watch out for.

Within loan insurance policies, other material clauses and payment exclusions can arise. Many plans do not pay benefits for missed time caused by pre-existing conditions, alcohol-related injuries or pregnancy-related complications. Considering there’s plenty of ‘grey area’ between how and why an injury occurs, it’s important to remember, you’re the one who’s required to prove the validity of your claim. It’s not the other way around. If the insurer believes – or has grounds to believe – that your condition is a result of a policy exclusion, it can be an uphill battle to obtain your benefits.

Some policies also outline the difference between being ‘unable to work’ and being ‘unable to work at any job.’ While an insurer may agree that your condition prevents you from working at your current job, it may insist that your injury doesn’t prevent you performing other types of employment. The end result? You may only receive a partial settlement and have to work elsewhere to come up with the rest.

While practices can vary widely across insurers, the important thing to remember is always read the terms and conditions before you sign on the dotted line.

What are Some Key Things I Should Know?

Always remember that insurance companies are for-profit enterprises. They are not in the business of providing affordable protection and paying out hassle-free claims. If a policy payment is triggered, you will be required to prove the validity of your claim.

When deciding the amount of loan insurance that’s right for you, you should assess your needs and the needs of your family. The purposes of loan insurance is to ‘insure’ against unforeseen loss. If you can quantify the maximum loss you can tolerate while still maintaining your current lifestyle, that’s usually a good starting point. Moreover, also think about your risk tolerance. Like many things in life, loan insurance is a speculative hedge. If you believe the chances of triggering a payment are more likely or less likely, you can use this information to determine whether full or partial coverage is more appropriate for you.

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