Credit health insurance is a type of insurance designed to step in if credit card holders or other borrowers become unable to meet their payments due to chronic illness or disability.
It can go by several names including:
- Credit disability insurance
- Credit accident and health insurance
- Payment protection insurance
In some cases, lenders may also be insured against the death or long-term unemployment of their debtors.
How Does Credit Health Insurance Work?
The idea behind credit health insurance is fairly simple, although it’s important to read the fine print of any policy you’re considering purchasing. In return for a premium, borrowers have the reassurance that their credit card or loan repayments will be met by their insurer if they become unable to pay.
Loans for a Fixed Amount
In the case of loans to be repaid in full within a set time period, such as car loans, the premium may be charged either as a single or monthly sum.
Single premiums are calculated at the time the loan is arranged and added to the total amount borrowed. This has the virtue of simplicity, but the disadvantage that interestwill be payable on the insurance premium as well as the primary loan amount, creating the potential for a significant increase in total cost.
But when premiums are payable monthly, the amount is typically calculated as a percentage of the outstanding balance and therefore reduces as the original loan amount is repaid.
Open or Revolving Credit
These kinds of loans, usually credit cards, allow customers to borrow flexibly (subject to a maximum limit) and repay as much or as little as they like (subject to a monthly minimum).
Credit insurance premiums are charged as a percentage either of the average daily or monthly balance. This amount will account for part of the minimum required payment, which will increase or decrease according to the total amount of outstanding debt.
The amount of the minimum payment represented by the insurance premium should be clearly shown on your credit card statements.
Who Benefits From Credit Health Insurance?
All credit insurances are primarily designed to protect lenders against the risk of bad debts. Because the premiums are charged to customers, these policies tend to be promoted heavily to those taking out new credit cards or other loans.
That said, there maybe certain benefits to the individuals who have taken out the loan.
Even a single missed or late payment may damage an individual’s credit score. So for those concerned about the security of their employment or anyone who is strongly averse to debt, insurance may bring a welcomed peace of mind.
Additionally, the opportunity for lenders to protect themselves against the risk of bad debts allows them to charge lower interest rates for their loans.
IsIt Required toHaveCredit Insurance?
No, it is not mandatory to purchase credit insurance. Lenders generally have a fairly wide discretionas to whom they offer credit, but they are not permitted to make loans conditional on the purchase of credit insurance.
Nor is it permissible to include insurance in the small print of a loan agreement without explicit disclosure to the customer and the securing of their written consent.
The best advice for customers who feel pressured to buy in this way is to look for another lender and report the offender to their state insurance commissioner and/or the Federal Trade Commission (FTC).
Considerations About Credit Health Insurance
Like all insurances, credit health policies are only worthwhile as long as their terms and conditions meet the particular needs ofthepurchaser.
Some policies, for example, will cover the full outstanding amount of a loan. Others may only cover the payments due during a period of unemployment or sickness. Most policies will specify a waiting period before coverage becomes effective, and this may vary from a couple of weeks to a month. And while some will grant coverage retrospectively from the date of a relevant event - such as an accident or the termination of unemployment -others will not cover a missed payment if notified after the event.
It’s important that borrowers thoroughly examine a policy before buying. Make yourself aware of the terms on which you may cancel the policy and if any premiums would be refundable.
How MuchDoes Credit Insurance Cost?
Premiums will vary depending on the amount and time period of the loan to be covered, the state the borrower lives in and, of course, the precise terms and conditions of the policy.
The U.S. Government Accountability Office, for example, has reported that typical premiums for insurance on credit card loans vary between 85 cents and $1.35 a month for every $100 of outstanding balance. 1 It might not sound like much, but on a $5,000 balance, those rates could be adding $44 to $67 to monthly repayments.
Is Credit Insurance Worth It?
Credit insurance can make sense in some circumstances, but there may be better options.
Life insurance, for example, may be a more cost-effective way for borrowers to protect their estates for their dependents. Some people may already have accident, long-term disability/sickness or unemployment insurance in place, which will help them make their loan repayments in the event they lose their income.
Through these alternatives, the insurance payments go to the borrower rather than the lender. This enables the borrower to exercise greater control over how they manage their finances.
You should never feel pressured into buyingcredit insurance by a lender or credit card company. The personal loan and credit card markets are highly competitive, and shopping aroundfor the best deal is highly recommended. Before making a policy purchase, consult a trusted financial professional who can help you better understand the terms, conditions and fine print of the policy.
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