The Loans Canada Team Investigates: Loan Protection Insurance

Any kind of security in this tumultuous world is tempting. However, consumers ought to be wary that often reassuring promises of insurance offer the mere illusion of protection. Sure, there are times when loan insurance can be useful as a safeguard against unexpected financial emergencies. If you want to avoid chasing the mirage of loan protection, it’s critical to understand how it actually works. Armed with a thorough comprehension of loan protection insurance, you can figure out if it’s the right approach for you. 

What Is Loan Insurance?

When you take out a major loan, whether that be a mortgage or business loan, you can opt for insurance. You pay for the coverage monthly; and, should a situation arise where you can’t cover your bills (such as illness, job loss, death, or an accident), the insurance makes the payment on your behalf. 

Entirely separate from a loan or a credit card, if used prudently, loan insurance can help you escape a financial emergency relatively unscathed. It goes by many titles, including balance protection coverage, balance insurance, debt insurance, and creditor insurance. 

Typically, this protection is very straightforward to access. To get loan protection insurance, you can usually go directly through the lender. Generally, a lender cannot force you to get credit insurance, though they can encourage you to sign up. Before you cross the t’s and dot the i’s, be sure that it’s the right call. 

Watch out for loan insurance scams.

How Does It Work?

There are a few things to keep in mind about how this type of insurance works. Insurance agencies are for-profit businesses — they want to make as much money as possible. Accordingly, these agreements are underwritten carefully. The contract will state how long you must have the insurance before they will make said payments. It will also detail how long the agency will pay on your behalf. Yes, this can work for you — but it can also add a potentially unnecessary expense to your budget (so make sure you understand the details).

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Payment

There are two main options for payment. The first is to pay the premium in full when you take out the loan. Alternatively, you can make recurring payments at the same time you make your loan payments.

Coverage Type

Because life throws different circumstances your way, there are different types of loan insurance. The categories include:

• Life Insurance – The type that kicks in in the event of a loan holder’s death.
• Critical Illness – The type that takes effect when the loan holder takes ill and offers a tax-free chunk of money following diagnosis — provided it’s a covered ailment. 
• Disability Insurance – This type of insurance is for when the loan holder is no longer able to work due to disability and provides regular income to cover payments.

Find out what type of insurance you need in your life.

Waiting Period

The industry standard is for the policy to be in effect for no less than 60 days prior to taking effect. Basically, you need to wait two months before the insurance becomes active. This is, however, standard for all types of insurance since it prevents consumers from taking advantage of the system. 

Duration Of Coverage

To stay profitable, insurance companies need to put a cap on the coverage duration. It would get pretty expensive to pay a client’s mortgage endlessly. As such, any standard insurance contract will last for no longer than 24 months. In essence, you cap out at two years of insurance payouts. 

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How Companies Are Taking Advnatage Of You With Loan Protection Insurance

It’s a dog-eat-dog world, and consumers have to keep a keen eye out for predatory lending practices. Some lenders will tack on loan insurance without informing you and getting your consent. Others will claim that you are obliged to get the insurance to gain loan approval. Be cautious, know your rights, and always read the fine print. 

This is such a pervasive issue, in fact, that a recent ACORN study found that as many as 12% of participants were deceived regarding loan insurance. By not being informed about optional products until the money was taken from their account, they were effectively duped into getting the insurance. A similar research project by Loans Canada indicated that 28% of respondents were debited loan insurance fees without having given their explicit consent either.  

Know Your Rights

First and foremost, understand that this type of insurance is in no way mandatory. It is entirely optional. To gain loan approval or activate a credit card, you do not need loan insurance. In fact, there are consumer protection laws that are designed to prevent loan holders from getting taken advantage of. 

Learn more about your rights and responsibilities as a borrower. 

Financial institutions which are federally regulated are legally barred from a practice called coercive tied selling. Prohibited in Canada, this is when a bank or other financial company pressures you into getting insurance through an affiliate partner, calling it a requirement for getting loan approval. 

In order to sign up for loan insurance, you must offer explicit consent. That means that you must agree to enroll in loan or credit insurance prior to being charged for the same. You must be informed of the terms of the agreement, including the waiting period and the cost. Provided you agree, then you can get the insurance benefits. 

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Drawbacks Of Loans Insurance

Nothing in life is without its risks; and, ironically, insurance is no exception. The name of the game is managing that risk so that you maximize the benefits while minimizing the likelihood of drawbacks. Potential issues with loan insurance include:

• Added Expense – You’re already paying the regular loan payments. Insurance is an added cost. Whether you pay it all upfront or each month, it means there is more money leaving your account. Yes, it adds a level of security, but only if your situation matches the fine print. Often, the products are not sold by licensed insurance professionals, meaning you are less likely to find coverage that meets your needs. 
• Fine Print – Underwriters are industry experts in making insurance companies profitable. The text is structured to minimize the chances of you being able to make a claim. Consider disability insurance. The disability must be approved by the insurance agreement in order to be covered. And, if you instead chose critical illness insurance, and your issue has been deemed a disability or you’ve violated your coverage terms, you may not see a payout at all. Because these caveats are included in the underwriting, you have no recourse. 

Find out what happens to your debt when you die.

Are There Any Positive To Loan Protection Insurance?

Just as there are risks, there are also some advantages to signing up for loan protection insurance. The main reasons you may want to accept loan protection insurance is it:

• Provides Peace of Mind – Wheter you lose your job due to job loss, a disability or some illness, you won’t have to worry about keeping up with your debt payments.
• Protects Your Credit Score – Moreover, with your debts covered you won’t have to worry about your credit score taking a hit. Your payment history accounts for approximately 35% of your credit score, so if you’re unable to make payments due to a job loss or diability, your credit score can be negatively impacted.

Things To Review Before Agreeing To Loan Protection Insurance

Before you sign up for loan protection insurance on a credit card or loan, be sure to review the details written in the certificate of insurance. There you’ll be able to find information regarding:

• The cost
• The coverage
• What are the requirement to make a claim
• The limitations and restictions (i.e, what is not covered and are there any circumstances that can deny you coverage)

Final Thoughts

Insurance is all about potential benefits and risk management. You want to get a safety net against unexpected financial situations, but you don’t want to sink your bank account in the process. There is no one-size-fits-all solution to loan protection insurance, but there is one central tenet that everyone can benefit from: do your research. Look through the contract, know the cost, risks, and potential benefits of the insurance, and decide if the chance of a bit of extra security is worth the investment.