Credit insurance pays off your loan or credit card balance if you can't make your payments due to death, disability, unemployment, or sometimes if property is lost or destroyed. One type of credit insurance protects businesses against non-paying clients.
- You can purchase credit insurance from your card lender that will cover your payments or pay off your balance if you can't make your payments due to a layoff or illness.
- Different types of policies cover other events, such as death, disability, or loss of property.
- Business owners can get coverage for customers who don't pay their bills.
- This insurance is often unnecessary if you don't carry balances on your credit cards or you have an emergency fund.
How Credit Insurance Works
Credit insurance is often an extra service that's offered by your credit card lender, either at the time you apply or later in the life of the loan. It's not sold by agents.
The premiums will vary based on the amount of the benefit. The higher the debt, the more of a premium you'll pay. It's often tacked onto your monthly bill until you use the insurance or cancel the benefit. But it can also be charged in one lump sum that's included in the total cost of your loan.
The insurance benefits are paid to the lender, not to you, if you have to make a claim.
5 Types of Credit Insurance
There are five types of credit insurance. Four are designed to protect consumers. The fifth type is for businesses.
Credit Life Insurance
Credit life insurance pays off your credit card balance if you die. This prevents your loved ones from having to pay your balance out of your estate.
Credit Disability Insurance
This coverage pays your minimum payment to your credit card issuer if you become disabled. You may have to be disabled for a certain amount of time before the insurance will kick in. There may be a waiting period before the benefit pays out. You can’t add this insurance and make a claim on the same day.
Credit Unemployment Insurance
Credit unemployment insurance makes your minimum payment for you if you lose your job through no fault of your own. The benefit doesn’t kick in if you quit or you're fired. You may have to be out of work for a certain amount of time before the insurance takes over your payments.
Credit Property Insurance
This protects any personal property you’ve used to secure a loan if that property is destroyed or lost due to theft, accident, or a natural disaster.
Trade Credit Insurance
Trade credit insurance protects businesses that sell goods and services on credit. It shields them against the risk that clients won't pay what they owe due to insolvency. A few other events may also be covered. Most consumers won’t need this type of insurance.
Alternatives to Credit Insurance
Whether you need credit insurance can depend on the type of debt you have. Some credit card lenders may use high pressure sales tactics to get you to sign up regardless of whether you need it. But it’s not a requirement for your loan.
You may not need insurance if you pay your credit card balance in full each month. You won't have a balance to worry about in this case.
You may be able to avoid credit insurance if you have money saved. The point of an emergency fund is to provide a source of funds you can draw from if you become disabled, lose your job, or have another loss of income.
Your life insurance plan may also provide enough protection that you can avoid having separate credit insurance. The death benefit paid out by your insurer should be enough to cover your debts at the time of your death and leave extra funds for your loved ones. Talk to your insurance agent about raising your benefit if it’s not enough to cover your existing debts, too. The cost may be less than separate credit insurance. And you won’t have to pay interest on your life insurance policy.
The Fine Print
Read the fine print of the benefits offered to you if you're thinking about this type of insurance. Find out when the insurance pays out. Pin down any events that aren't covered. Weigh whether the insurance is better than other coverage you may have.
Don’t sign up over the phone if it’s promoted by credit card customer service. Ask for a brochure or website that you can visit to learn more about their plan. Make sure you know how you can cancel the insurance if and when it’s no longer needed.