When a person applies for a loan, they are often given the option of purchasing a credit insurance policy. Credit insurance provides coverage to both the lender and the person taking out the loan. The insurance would pay off the balance of the loan in the event the borrower was killed, disabled or unemployed. Generally the cost is built in to the loan payment itself. Credit insurance is usually voluntary however at times it can be a part of the loan proposal when a person applies for a mortgage or personal loan.

There are several different types of credit insurance available for borrowers. The first is credit life insurance, which simply put, will pay the lender the loan’s outstanding balance in the event of the borrower’s death. The second is credit disability insurance, which is also known as accident and health insurance. This type of credit insurance policy makes monthly payments to the lender during periods when the borrower is unable to work due to an illness or injury as a result of an accident. This type of credit insurance usually requires that the policyholder remain unable to work for a minimum amount of days before benefits are distributed. Often the compensation is paid retroactively to the first day the person was disabled, but is not dispersed until that waiting period is fulfilled. Another type of credit insurance available is credit unemployment insurance, which makes monthly payments to the creditor in the event the borrower becomes involuntarily unemployed. Much like disability insurance, this type of credit insurance policy often stipulates a waiting period during which the policyholder must remain unemployed before the benefits are disbursed. While some policies also pay retroactively, other may not and will only provide compensation beginning after the satisfaction of the waiting period.

Before purchasing credit insurance the borrower should consider whether or not the premium will be included in the loan and whether it will increase the loan amount, thus adding to the amount of interest that will need to be paid. Whether or not the borrower has sufficient assets or savings to repay debts in the event they are unable to earn an income is a key factor in determining whether or not credit insurance is a necessity.

Buyers should also understand whether or not the policy can be canceled and whether or not there are exclusions or conditions to the disbursement of benefits. Also the policyholder should ascertain whether or not it is possible to cancel the insurance and what type of refund is offered in that event. All of these facts should be discussed before the policy is finalized and signed.