Credit Insurance: What Is It and Is It Worth It?

Insurance can often feel like that one membership or subscription service you never use. Although, when you need it the most, you’ll be thankful you have it.

However, all insurance policies are not created equal. Plans such as health, dental and life insurance are some of the more sensible insurance policies. Nowadays, almost anything you purchase with a high value may come with a choice to opt-in to their insurance plan.

When you take out a loan or open a new credit account, the lender may offer protection in the form of credit insurance. On the surface, credit insurance may seem like a good backup plan. But is it worth paying the extra premium? Is it practical?

Keep reading to find out the answers to those questions and many more as we discuss everything you need to know about credit insurance before you consider paying for the additional coverage package.

What Is Credit Insurance And How Does It Work

Credit insurance acts as a safeguard for your loan or credit card payments in the event of financial hardship such as sudden job loss, your inability to work due to a disability or if you die unexpectedly.

At first glance, credit insurance may seem similar to life insurance or disability insurance. The main difference is credit insurance does not pay you out, but rather it guarantees that the lender will receive payments. As a result, your credit score is protected.

Credit insurance may be available on various loans, including mortgages, personal loans, credit cards and auto loans.

When applying for a loan or a new credit account, the lender may offer this coverage to you. Before purchasing the additional coverage, you should read the fine print in the terms and conditions to determine if the protection is the right decision for you.

The Different Types Of Credit Insurance

Credit insurance is generally the umbrella term used for various types of insurance policies. The following are the five main types of credit insurance coverage packages.

• Credit life insurance: May pay off some or all of the remaining loan payments to the lender if the borrower passes away.
• Credit disability insurance: The lender will receive a limited number of monthly payments if the borrower can’t work due to an injury or severe sickness. This coverage is also known as accident and health insurance.
• Involuntary unemployment insurance: A limited number of monthly payments will be made to the lender due to sudden job loss through no fault of the borrower’s own.
• Credit personal property insurance: Generally offered by jewelry or furniture stores, this type of coverage protects personal property that was collateral for the loan if it got stolen or destroyed.
• Credit leave of absence insurance: The lender will receive a limited number of monthly payments if the borrower has to leave their job to take care of a family member.

Your lender may also bundle some of the different types of credit insurance into one single package.

Additionally, you may need to apply and verify that you’re eligible to receive the benefits from any given policy.

For example, you may need to prove to the lender that you were working to be eligible for involuntary unemployment insurance.

How Much Does Credit Insurance Cost?

The annual cost of credit insurance may depend on a variety of factors, including the type of loan, type of coverage you choose, the loan’s terms, the loan amount and the state you live in.

Moreover, the price of credit insurance largely depends on the commission that insurers pay lenders. Consequently, credit insurance premiums are generally more expensive than other common types of insurance premiums.

The State of Wisconsin Department of Financial Institutions estimates that the annual cost for credit life insurance for a 30-year-old with excellent health is approximately $370 for $50,000 of coverage. They compared it to a term life insurance policy that totaled nearly $80 annually.

The credit life insurance plan costs almost five times more than a term life insurance policy. If you’re looking for a program that makes financial sense, a credit life insurance plan may not be suitable for you.

Is Buying Credit Insurance A Good Idea?

As with almost any insurance plan, you’re paying a premium to mitigate the damage when or if you need to use it. The same thing goes with credit insurance.

Opting to purchase a credit insurance policy can help prevent an unforeseen event from affecting your loan or credit payments. As a result, you wouldn’t have to choose which bills to pay or fret over missing a payment causing late fees to activate or destroy your credit.

So, is credit insurance worth purchasing?

If you already have life or disability insurance coverage, a credit insurance package may not make the most sense for you. Traditional coverage is generally cheaper, and your family will receive compensation if an unexpected event occurs instead of the lender.

Are you still unsure about purchasing credit insurance? Here are some other components to consider.

• Credit insurance premiums may be added to the overall loan or credit amount. It will accrue interest and increase your monthly payment. The extra cost might not be included in the loan’s annual percentage rate (APR). However, members may see the cost included in the APR.
• Plans such as credit disability and involuntary unemployment policies generally cap the number of monthly payments, which may be reached before the loan is fully paid.
• As you pay off the loan or credit payments, the benefits of credit insurance start to dwindle.

Shopping For A Loan? Consider Arizona Central Credit Union

Credit insurance is one of the more expensive insurance packages. You’ll need to determine if the benefits outweigh the drawbacks before purchasing the policy.

If you’re in the process of searching for a loan, Arizona Central Credit Union can help you fund your next large purchase. Visit our Loans page for more information on the various types of loans we offer and get started with the application process.

Want additional information? Contact us via telephone or submit a contact form, and loan specialists will be in touch.