What happens if you get laid off and can’t make your mortgage payment? How about if you get in a car accident and have to miss work? How do you find the money to cover your credit card bills?
These are a few of the situations that credit insurance is designed for. However, credit insurance does not come free of charge.
So how do you decide if it’s worthwhile?
Let’s take a look at the four popular types of credit insurance, and whether or not they make sense for your financial situation.
1. Credit life insurance
If you unexpectedly pass away, you could be leaving a family member stuck with your bills. Some of these bills may include expensive mortgage payments that your partner may not be able to afford without you.
Credit life insurance instantly pays off insured loans in the event of your death. This prevents others from being stuck with the monthly payment. Or, even worse, possibly facing foreclosure if they’re unable to afford mortgage payments.
If you have regular life insurance, it may include a big enough payout that credit life insurance is not necessary. So think twice before signing up if you have other coverage.
2. Credit disability insurance
Like the name implies, credit disability insurance kicks in if you are disabled in an accident or due to a health problem. This product is also sometimes sold as credit accident insurance or credit health insurance.
If you are unable to make your regular scheduled payments due to illness or injury, credit disability insurance covers your payments until you are able to make your payments again.
Keep in mind though that many employers offer disability insurance, which offers income replacement in the event of a disability. This could be used in place of credit disability insurance.
Group policies are typically a better deal when it comes to employee disability insurance. So if you get this from work, it could be redundant to also pay for credit disability insurance.
Like with credit life insurance, be careful to avoid double coverage. Also, if you are permanently disabled, you may qualify for a student loan discharge.
3. Involuntary unemployment insurance
When our grandparents were young and employed, they probably had one of those jobs where you could have the same employer for your entire career. They probably received regular pay and maybe even a nice pension as long as they performed satisfactorily.
Unfortunately, those days are long gone. Nowadays, it’s common to read about mass layoffs at even the biggest companies. Telecom, oil and gas, and tech industry jobs have proven to be volatile, even for the most valuable workers.
If you are laid off without cause, involuntary unemployment insurance covers your monthly payments to protect your property and your credit when your income is unexpectedly halted. This insurance can be a big financial help and hold you over until you find your next job.
4. Credit property insurance
Credit property insurance covers property purchased with a loan or credit card.
For example, if you get credit property insurance on your car and it’s destroyed by vandalism, credit property insurance kicks in and covers the payments for the lost property.
Homeowners and auto owners typically always have property coverage, so paying for this type of credit insurance may be an extra, unnecessary expense. However, for purchases made with a credit card, those items are typically not insured unless covered by a renter’s insurance or homeowner’s policy.
Lenders like credit property insurance because it acts as an additional layer of protection to ensure they get their money back. On the other hand, it is extra protection for the lender at your expense.
How to get credit insurance
In some cases, a lender may try to sell you credit insurance as part of a new loan package. Sometimes it is automatic unless you opt out, so always look at what you are agreeing to pay for before closing any loan.
Credit insurance is not compulsory by law, so a lender can never force you to get credit insurance.
If you do decide you need credit insurance for your home, car, or other loans, you may be able to buy it through your lender. Or, you can search for a reputable, trusted insurance company that offers credit insurance products.
Do you need credit insurance?
As you saw in the examples above, credit insurance can be unnecessary if you are covered by other insurance for the same scenario. Life insurance, disability insurance, and property insurance are all very common. Therefore, credit insurance might be an extra expense that you can avoid.
However, you may be self-employed and don’t have disability insurance. That’s when credit disability insurance could be a huge financial lifeline in the event of an injury or illness. Credit life insurance can work as a backup plan for individuals, especially ones who have dependents.
If you don’t want to see your credit score drop significantly, and the price is reasonable, you may want to consider credit insurance. There will always be cases where credit insurance makes sense, it just all depends on the cost and your specific needs.
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