What Is Loan Insurance?By Caitlin in Loans
As life progresses, it’s always a good idea to start thinking about insurance. Life insurance, car insurance, home insurance, whatever that type of insurance it might be, it’s best to consider it when you’re young so that in can benefit you in your later years. Loan and credit insurance, otherwise known as “creditor insurance” or “debt insurance” can be used to pay off the balance of a loan in the event of a sudden illness, accident, disability, or death. So, if you should pass away or become unable to work due to one of these circumstances, your insurance provider will help cover what you owe to your lenders or creditors.
However, it’s important to know that loan insurance varies from loan to loan, meaning you need to open a separate insurance policy for each loan that you have. The terms of a mortgage loan insurance policy will be different from the one you’d receive for say, credit card balance insurance. So, before applying for whatever loan insurance you might need, it’s important to understand your options.
Distinguishing Real Loan Insurance from a Loan Insurance Scam
First thing’s first. When you’re thinking about applying for a loan and getting insurance with it, you need to be able to distinguish between an official policy and the fake ones dealt out by scam artists posing as lenders.
Unfortunately, this type of scam happens all over the country. It usually happens when someone isn’t being cautious enough while looking into a lender, often online. They’ll come across a company with a fancy website that offers every kind of appealing loan benefit such as low-interest rates, a decent payment plan, etc. The borrower fails to research the organization properly and contacts them for a loan application. The company contacts them back and says they will grant them a loan on the condition that they pay “loan insurance” up front because that supposed “lender” will be taking a great risk on their behalf. The would-be borrower is often in desperate need of financing for something important, so they agree and fork over all their personal and banking information.
Here’s the problem. No legitimate lender will ever ask for a payment upfront. In fact, asking for any kind of insurance or security deposit before a borrower receives their loan is illegal. If they do and you pay it, you’ll not only lose that money you deposited, but your banking information could be compromised. They’ll tell you your loan should arrive in a few days and during that waiting period they will have ample time to disappear. This is why it’s extremely important to do proper research before deciding on a lender. Always make sure to look up the organization in the Better Business Bureau database to see that they are a reputable company.
For more information on Loan Insurance Scams, click here.
Generally, you can get legitimate insurance for your loans and lines of credit through insurance companies, brokers or agents, and the lenders themselves (banks and traditional financial institutions included). Since loan or credit insurance is not always a requirement, if you desire it, you will need to give the provider verbal, written, or electronic consent to receive a policy.
Mortgage Loan Insurance
When potential homebuyers can’t afford to make a down payment of more than 20% of the initial asking price of a house, which is common, lenders will require them to qualify for and then purchase Mortgage Default Insurance. In Canada, the minimum down payment on a house costing $500,000 or less is 5%. The insurance costs will help cover any payments that are defaulted by the borrower, protecting the investment made by the lender and allowing them to offer the client lower interest rates.
Initially, the borrower will need to pay an insurance premium that is dependent on the size of the down payment. For example, aA down payment of 5% to 9.99% of the total value of a mortgage will require a premium of 3.6% of the home’s value. In Canada, there are three companies who provide mortgage default insurance: CMHC (Canada Mortgage and Housing Corporation), Genworth Financial Canada, and Canada Guaranty.
Credit Card Balance Insurance
When you’re approved for a new credit card, the company you’ve signed up with will offer you credit card balance insurance. If you should lose your job, fall ill, or have any other type of injury that prevents you from working, this type of insurance will usually cover between 5% – 10% of the monthly balance on your credit card bill for 10-24 months. If you should become physically disabled or pass away, the insurance will then cover the entirety of your outstanding balance or up to a specified amount.
Talk to your credit card company to see if you qualify for credit card balance insurance.
Critical Illness and Disability Insurance
Critical illness insurance will help cover the remainder of your loan and credit payments in the event of that you are stricken with a serious illness that prevents you from working. The full list of illnesses will be specified within the terms of your insurance policy. However, there are several specific illnesses that are typically not covered if you have them before you qualify for this type of insurance.
Disability insurance, on the other hand, will not necessarily cover the entire cost of your loan and credit bills. Instead, the minimum balance of each payment will be taken care of in the event of a sudden sickness or accident that physically disables you and makes you unable to earn an income. This policy will also only last a certain length of time, and once the coverage period has ended or you recover fully from the disability, you will again be responsible for remaining balances on your loan or credit line. As it would be with other forms of insurance, your ability to qualify will vary depending on the terms set by the insurance provider.
Life Insurance (For Loans and Credit)
Not to be mistaken with typical life insurance, in the event of an insured borrower’s death, the insurance provider will use part of, or the total value of the “death benefit” towards paying the remaining balance of their loan or credit product. The premium you would pay to your insurance provider will fluctuate in accordance to the type of loan that needs to be paid. However, the amount that would be taken from the death benefit will decrease as you continue to make payments and reduce what remains of your loan debt.
Because of this, it’s very important to note here that your family or beneficiaries will not receive the full death benefit if your loan has not been paid by the time of your death. So, if you want to leave a separate amount aside for your loved ones in the unfortunate event of your passing, that you’ll need to purchase a separate life insurance policy to go with it.
Visit the Government of Canada website for more information on Loan Insurance.
Is Loan Insurance Right For You?
Not all types of insurance are absolute requirements, but it can be very beneficial to both you and your loved ones to consider them. While you’re in good physical, mental and financial health, it can seem like loan insurance is not a necessary thing. However, paying a premium for any kind of insurance is the same principle as having a rainy-day fund set up, just in case any kind of emergency should arise, whether it be a medical emergency or a financial one.
There are of course benefits and drawbacks to opening up a loan insurance policy. For example, loan insurance can help protect your credit score, because you won’t be defaulting on your payments if you’re unable to earn an income due to any of the above reasons. On the downside, not everyone can qualify for all types of loan insurance. Your application might be rejected if you are self-employed or only working part-time. Certain pre-existing medical conditions such as asthma or high blood pressure will often not be covered under a critical illness insurance policy.
Given all the factors that need to be considered before you apply for any kind of insurance, loan insurance included, it’s a good idea to do research, based on your specific needs, to determine which insurance is right for you.