If you’ve ever taken out a loan or applied for a credit card, there is a chance you received a sales pitch for credit Insurance. In fact, you might even be paying for it right now without realizing it. Let’s talk about what credit insurance is, why someone might need it, and how to find out if it’s right for you.
Credit protection insurance: What you need to know before you sign up
Credit protection is a form of insurance that covers the balance of a debt. This product goes by several names, including credit protection, creditor insurance, creditor protection, credit insurance, balance protection, trade credit insurance, mortgage insurance and loan insurance. Credit protection insurance is available for individuals or businesses.
Credit protection insurance steps in for some particular covered circumstances, when you may not be able to make payments on your loans. The insurance can pay some or all of your debt if you die, lose your income, or become disabled. It can support families who carry debt and want a safety net tied directly to each credit product.
Understanding the coverage credit insurance provides can help you know if this type of product is right for you. Compare the average cost and coverage that credit insurance provides with alternatives. Comparison with your other insurance policies will help ensure you are not over-insured or under-protected. Doing so will help you decide what best fits your needs.
What credit protection insurance covers
Credit protection insurance links an insurance policy to a line of credit, a loan or a credit card. It covers your monthly payment or your full balance if you face death, disability, job loss, or a critical illness. Some versions include a waiting period before benefits begin. You may find the premium is tied directly to your balance. Some policies include limits on how much they pay and for how long they cover the debt. Others add the full premium amount to your loan balance, while others may charge a monthly premium.
Considering credit protection? It is important to assess the coverage and the circumstances in which the policy will provide coverage.
Wondering how to get insurance? When you take out loans, open a line of credit, or carry trade credit for your business, you take on credit risk. Credit insurance provides your family protection so unpaid balances do not become a burden. Credit protection also gives your lenders confidence that payments will continue even if you lose your income.
Pros of credit protection insurance
Whether you are considering credit insurance as an individual or a business, here are some reasons why it might make sense
- You protect your credit score because the insurer pays the debt during a claim.
- You protect your family if your life ends before the debt does.
- You protect your business if you rely on trade credit or accounts receivable financing.
- You avoid missed payment fees during short-term disability or job loss.
- You keep your accounts stable without manual payment arrangements.
- You reduce credit risk when cash flow drops suddenly.
Credit protection is most effective when you use a credit card or line of credit as part of your daily financial plan and do not have sufficient separate coverage to absorb a prolonged disruption. Even if you have credit protection, maintaining good credit habits and always paying more than your minimum can help reduce your debt burden.
Downsides and gaps you need to know
This product might not be right for everyone, so be sure to make an informed decision.
- The premium can be high compared to alternatives.
- The insurance coverage may overlap with the life insurance or disability insurance you already own.
- Some claims fail due to exclusion rules.
- Some consumers report aggressive sales and being enrolled without consent.
- Some people pay for years without understanding what coverage they have or even recognizing they are paying for it.
- Often, there are tight limits on total payout.
- Coverage tied to a revolving balance, like a credit card or HELOC, may cost more over time.
- Waiting periods may mean payouts are delayed when they are most urgently needed.
- Just like credit card companies determine your APR based on your credit score, a lower credit score may impact the insurance premiums you qualify for.
- This type of insurance works best when you understand the fine print. You’ll need to review the certificate or policy before you sign anything.
Cost-benefit comparison: Creditor insurance vs life and disability insurance
Life insurance covers more than just a single debt, and depending on your coverage, could be well over and above any and all debts you have. Disability insurance covers your income in the case of disability, not only one lender. Both types of insurance protect your household without tying protection to a specific credit account.
Credit protection insurance covers only the debt it is insured to cover. The premium may look small at first because it links to the balance. Over an extended period, you may pay more than you expect. Check if you are also charged GST or HST on your premiums to understand the full cost.
Credit protection insurance can cost more over time if you have multiple loans. Buying a term-life insurance policy or a long-term disability policy often gives you broader protection at a lower overall cost. In many cases, it is cheaper to purchase broader coverage than to insure each debt. However, it can fill a gap when you have no individual coverage and want quick protection for a new balance.
The insurance gap
Studies show that many households do not carry enough insurance to protect against significant debts. A mortgage, a line of credit, a vehicle loan, and a credit card balance can put pressure on finances if income drops. Credit protection insurance helps fill this gap. It does not replace full life insurance coverage or full disability coverage, but it adds a layer of protection for specific accounts. Some Canadians may use credit protection insurance to fill the gap in short-term situations. Ensuring you are adequately insured is an important step.
Sales pressure and tactics
Sales pressure to purchase credit insurance policies during loan sign-ups is common. Being enrolled without full consent could also happen. Some customers never receive a copy of the insurance policy, while others don’t know how to cancel.
As a consumer, you have the right to decline the coverage. Be sure to ask for the full policy details and understand the coverage and the terms before you agree. You also have the right to cancel if you never wanted the coverage. Don’t be afraid to ask.
You can protect yourself by reviewing your account statement and monthly payments. Conduct an annual review of your policies and the fees you pay for various other products to determine whether they still fit your needs and whether you can get lower rates.
The bottom line
Credit protection insurance can help you manage the risk associated with your debt and protect your finances, especially if you have loans, credit cards, or a line of credit. It doesn’t replace life or disability insurance, but it adds extra protection for specific accounts. By understanding the coverage, checking your needs, and comparing costs, you can make a wise choice.
