Why credit insurance actually makes sense
Benjamin Franklin coined the popular phrase that in life “nothing can be said to be certain, except death and taxes”. But let’s make plain what’s implied in that sentence as an overarching certainty of life: uncertainty.
The world is a dynamic and exciting place but the same thing that makes it fun, the unknown, makes life scary and intimidating. When we look at our personal finances – bills we have to pay, our outstanding debt, our salaries and savings – in the lens of uncertainty, an unexpected emergency can leave us financially vulnerable.
This is where credit insurance comes in. It’s a tool to include in your personal financial management strategy to mitigate the risk of uncertainty.
To help you decide whether it's worth buying credit insurance or not, we came up with this quick guide to credit insurance.
What is Credit Insurance?
Credit insurance is a policy that you can take out on your loan or credit card. This is an insurance plan that will help you pay off the balance of your loans in case something unfortunate happens to you, such as involuntary unemployment, inability to work due to an illness, or even death.
Is Credit Insurance the same as life insurance and disability insurance?
No. Life insurance is intended to provide financial support to your loved ones after you've passed away. Credit insurance, though can also provide a similar benefit in the event of untimely death, provides benefits for other unexpected events as well like involuntary unemployment and disability. Another difference is life insurance benefits pay out to your beneficiaries while credit insurance pays directly to your creditors to cover your monthly loan payments.
Even though life insurance can cover your debts in the event of death, this reduces the benefits that can go to your beneficiaries. Credit insurance covers a very specific risk – uncertainty related to paying back your loans. Credit and life insurance should not be seen as alternative to each other but as a complements and supplemental to your risk mitigation strategy to strengthen your personal financial situation.
Disability insurance is also known as income protection. This covers a portion of your income in the event of short-term or long-term disability that prevents you working and earning income. However, similar to the the reasons explained above in the life insurance section, credit insurance is tied to a specific loan and in the event of a disability, credit insurance would kick in to pay the lender so you don’t have to, whereas the disability insurance would pay you to cover your income.
For most people, their employers offer a form of insurance products including life and disability insurance. But again, this coverage is incomplete for 70% of Americans who has taken out a loan to consolidate consumer debt.