5 Types of Credit Insurance
Credit insurance is a type of insurance that pays off your loan or credit card balance if you’re unable to make payments due to death, disability, unemployment, or in certain cases if property is lost or destroyed. For businesses, one type of credit insurance provides protection against non-paying clients.
How Credit Insurance Works
Rather than being sold by insurance agents like with life insurance and auto insurance, credit insurance is typically an extra service offered by your credit card issuer or lender, offered either at the moment you apply or later in the life of the loan.
Credit insurance premiums vary depending on the amount of the benefit. Generally speaking, the higher the debt, the higher your insurance premium will be. The insurance premium is often tacked onto your monthly bill until you use the insurance or cancel the benefit. In other cases, the credit insurance is charged in one lump sum and included in the total cost of the loan. If you have to make a claim, the insurance benefits are paid directly to the lender, not to you.
5 Types of Credit Insurance
There are five types of credit insurance—four of them are designed for consumer credit products. The fifth type is for businesses.
- Credit life insurance pays off your credit card balance if you die. This keeps your loved ones from having to pay your outstanding credit card balance out of your estate or worse, out of their own pocket.
- Credit disability insurance pays your minimum payment directly to your credit card issuer if you become disabled. You may have to be disabled for a certain amount of time before the insurance pays out. There may be a waiting period before the benefit kicks in. So you can’t add the insurance policy and make a claim the same day.
- Credit unemployment insurance pays your minimum payment if you lose your job through no fault of your own. If you quit, for example, the insurance benefit doesn’t kick in. In some cases, you may have to be unemployed for a certain amount of time before the insurance pays your minimum payment.
- Credit property insurance protects any personal property you’ve used to secure a loan if that property is destroyed or lost in theft, accident, or a natural disaster.
- Trade credit insurance is a type of insurance that protects businesses that sell goods and services on credit. It protects against the risk of clients who don’t pay because of insolvency and a few other events. Most consumers won’t need this type of insurance.
Alternatives to Credit Insurance
Depending on the type of debt, you may not necessarily need credit insurance. While some credit card issuers or lenders may use high-pressure sales tactics to get you to sign up for the insurance, it’s not a requirement for your loan.
With credit cards, you may not need insurance if you pay your credit card balance in full each month since you won't have a balance to worry about.
You may be able to avoid credit insurance if you have an emergency fund saved up. The point of an emergency fund is to provide a source of funds if you become disabled, lose your job, or have another loss of income.
Your life insurance policy may also provide enough protection to avoid having separate credit insurance. The death benefit paid out by your life insurance should be enough to cover your outstanding debts and leave extra funds for your loved ones. You can talk to your insurance agent about raising your death benefit if it’s not enough to cover your existing obligations. The cost may be lower than separate credit insurance and you won’t have to pay interest on your life insurance policy.
If you’re considering credit insurance, it’s important to read the fine print of the benefits offered, when the insurance pays out, and any exclusions. Weigh whether the insurance is better than other coverage you have.
Don’t sign up for insurance over the phone if it’s promoted by a credit card customer service representative. Instead, ask for a brochure or website that you can visit to learn more about the details of the insurance. Make sure you know the events that aren’t covered by the insurance and details on how you can cancel the insurance if it’s no longer needed.