Managing debt can be a challenge. Sometimes that challenge is driven by circumstances out of your control. Critical illness or disability can put a huge strain on your finances, making it hard to pay off a credit line or loan.
Those times of distress are what loan insurance is designed for. But is it always the right choice? Depending on the type of debt, your lender and your personal circumstances, it may be the best fit -- or just another option.
How Does Loan Insurance Work?
Your lender may offer loan insurance at the time of application for a credit card, loan or line of credit. You'll have to pay either a one-time, upfront fee for the policy, or a regular premium. Insurance might cover the remaining balance in the event of death, or regular payments while you are sidelined due to disability or serious illness. Some policies may also cover you in the event of job loss.
If you don't sign up for insurance at the time of application, you may be able to do so later. Just ask your lender.
What Are the Drawbacks?
Loan protection insurance saves you paying off debt, but you don't receive a cash payout. Unlike other forms of insurance, you don't have the option to get money and distribute it in the way that makes the most sense for your financial situation.
It is important to understand how your premiums will change throughout the life of your loan. Some types of loan insurance, like mortgage protection, charge a fixed premium even as the balance on the mortgage goes down. Revolving forms of debt, like lines of credit, may have a premium based on the most recent outstanding balance. In that case, the charge for the insurance varies month-to-month.
What does this matter? You may want to weigh the cost of the insurance against the potential payout. If your premium is fixed as your debt goes down, you get less value out of the policy -- but still get valuable protection against what might otherwise be devastating debt.
As with any insurance, you may never use it. If you are confused about your coverage, you may assume you can avail yourself of the benefits and discover you can't. For that reason, it's important to read and understand your coverage before signing up.
Are There Any Alternatives?
There are other insurance products that offer a financial safety net in the event of death or serious illness. Life, critical illness or disability insurance may give you similar protection. The main difference is that the payout goes to you or your beneficiaries. Since it is not specifically tied to the debt, you can use the money where it is most needed.
You have the option to purchase both loan protection insurance and another product such as life insurance. That way you have protection for the debt, as well as financial security for other obligations in your life.
Finding the Best Financial Products
To get on a strong financial footing, it's important to thoroughly review your options for insurance and loans. Check out the latest quotes and up-to-date information on RateSupermarket.ca.