Do you need credit insurance? In a word, maybe! It depends on a number of things like where your income is derived, the type of other insurance coverages that you have, and the type of credit that it is covering.
What is Credit Insurance?
Not to be confused with debt forgiveness programs, Credit Life Insurance will guarantee that if you die, your loan will be paid in full, thereby leaving your estate (or at least a little more of it) to your heirs. Example: You have a $15,000 car loan which is covered by Credit Life Insurance. You die. Instead of having to payoff the car with your life insurance policy, liquidating it, or letting the lender repossess it, the credit life insurance pays off the loan, the estate keeps the car, and the life insurance proceeds can be used for things other than paying off the car. Your estate effectively gets the car without having to pay for it. Like debt forgiveness programs, you pay a monthly premium for Credit Life Insurance.
Credit Disability Insurance is what you want in case you live! Insurance studies show that you are 4 times more likely to become disabled than die in an accident. This type of insurance will make 100% of your loan payment until you are able to return to work or until the loan is paid in full (up to an upon amount, talk to your loan officer). Example: You fall off of you back porch and break you back while going outside to get your dog. You can't work. How are you going to pay for your car loan? Here comes Credit Disability Insurance to the rescue! Sure, you might be entitled to short term disability from other sources, but this temporary income is usually significantly lower than your regular income. With Credit Disability Insurance, you don't have to worry about a large chunk of this temporary supplemental income going towards what is usually a pretty big car payment.
So, do you really need this coverage?
If you have a whole pile of life insurance (a million dollars or so), and relatively little other debt, then you probably don't need Credit Life Insurance for small balance loans, like cars, ATV's, snowmobiles, things like this. You might consider it for a mortgage or other very large balance loan. Although you could increase you life insurance policy instead...
To determine whether or not you should have Credit Disability Insurance, you need to think about how you will pay your loan obligations if you were to become disabled, earning a small percentage of your normal pay. If you can meet your obligations on the reduced pay, maintain your good credit rating, and otherwise not experience undo hardship because of the reduced pay, then you probably don't need credit life insurance. On the other hand, if your credit is at risk, if you think you might risk a repossession, or get behind on the bills, you should seriously consider purchasing this coverage.
How much does it cost?
Credit Life Insurance is relatively inexpensive, usually just pennies for every $100 of loan balance. Credit Disability Insurance will cost more than Credit Life Insurance, but remember you are 4 times more likely to use the Credit Disability Insurance than the Credit Life Insurance.
Don't let the cost of optional Credit Life and Disability Insurance deter you from purchasing it if you think you need it. Moreover, if you think the added costs is out of your budget then you need to reconsider whether or not you can afford to not have this insurance. If you can't afford the payment with insurance, then you probably can't afford the loan because how will you pay it back if you become disabled?
For most of us, Credit Life and Disability is worth the added expense. If you feel you can't afford it, then you should examine very closely whether or not you can even afford the loan. If you can't afford the payment with insurance, how will you afford the payment on a reduced income?
Most lending institutions offer optional credit life and disability insurance. You can expect the cost to run about $.50 per thousand for single credit life, and about $2.00 per thousand for single credit disability. The amount added to you monthly payment for a $25,000 loan would be $62.50. Keep in mind that this is decreasing term insurance. The premium is recalculated each month based upon the outstanding loan balance. As your loan balance decreases, so will the monthly insurance cost.
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