What is credit insurance?
Credit insurance or debt cancellation coverage is sold by lenders -- including banks, credits unions, auto dealers and finance companies -- when you take out a loan or open a credit account.
You pay the premium and if you lose your job, become unable to work due to a disability, or die, the insurance protects the lender by making payments on your behalf.
Credit insurance may help you sleep at night, but it can cost you significant money for little payout.
Four kinds of credit insurance
- Credit life insurance - Pays off all or some of your loan if you die.
- Credit disability - Pays a limited number of monthly payments.
- Credit involuntary unemployment - Pays a specified number of monthly loan payments if you're laid off.
- Credit property - Protects personal property used to secure a loan if it's destroyed during the term of the coverage.
Cautions about credit insurance
- The premium for credit insurance is often included in the total amount of the loan or credit, meaning you pay interest on it. This can cost you a lot of money over time.
- If you choose to buy credit insurance or debt cancellation coverage, make sure you understand the benefits and terms.
- Double check that you really need the coverage. If you have life or disability insurance you may already be covered.
Remember, credit insurance is voluntary
Don't let anyone pressure you into buying a policy. Lenders cannot deny you a loan or a line of credit if you don't buy credit insurance from them. But you could be required to show you're already covered or you may have to buy it on your own to get the loan.