You may already have disability insurance to help cover a portion of your salary if you experience an illness or injury that leaves you unable to work. But often that’s not enough to pay all of your bills. Credit disability insurance can help take away the stress of your loan payment until you go back to work.
What is credit disability insurance and how does it work?
Credit disability insurance pays your loan payments when you can’t work after a disability. Typically, this insurance is offered by your lender when you’re approved for a loan and can apply to different kinds of loans, such as auto loans, personal loans, credit cards, home equity lines of credit and even some mortgages.
Depending on the policy, you may need to be out of work for 14 to 30 days before your benefits start, but most policies are retroactive to the first day of your disability.
Once your policy kicks in, it includes a monthly maximum and coverage maximum for the entire policy. This is how much your policy will pay out for loan payments if you experience a disability and can’t work. For example, your monthly limit might be $500 and your policy limit $25,000.
How much does credit disability cost?
Credit disability insurance is either added to your loan payment or billed separately, and the cost will depend on which structure you choose. Your premium may be structured as a single or monthly payment.
- Monthly payment. Your premium is determined by the amount you owe. Typically, it will be listed as a small amount per $100 or $1,000 of your loan. For example, the premium may be $2.50 per $1,000, so a $10,000 loan would have a $25 monthly premium. But as you pay down your loan, your premium goes down as well. So, when your loan is paid down to $6,000, your premium is only $15 per month.
- Single payment. With this structure, the total cost of your coverage is added to the balance of the loan and the cost is part of your monthly loan payment. But this structure also means that you are paying interest on your insurance premiums.
How do I compare credit disability insurance?
Credit disability insurance is typically a form of group insurance purchased by your lender to offer all of its borrowers, so you may not have your choice of policy. But there are individual policies available and key factors to consider before you apply for this form of coverage.
- Cost. Do the math to figure out how much you’ll pay in insurance over the time of your loan to decide if the coverage is worth it.
- Payment structure. How you pay for the coverage can help you determine the expense of the policy. For example, you should avoid a single payment structure, if you don’t want to pay interest on your insurance coverage.
- Coverage limits. Be sure to check both the monthly payment maximum and the full policy payout to make sure your coverage will actually cover your loan.
- Your age and health. If you’re close to the maximum age of the policy, or have an established health condition that could cause your disability, this coverage may not be worth it for you.
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How do I qualify for credit disability insurance?
There is no medical exam required to get this insurance, but your policy may come with the following conditions:
- Age limit. You likely won’t be able to get a credit disability policy if you’re older than 65 years old.
- Work requirement. You must be employed at the time of your disability to get the payout, but the number of hours required varies between plans. Typically, the policy requires that you are working full-time.
- Pre-existing conditions. You probably won’t be covered for an illness you were diagnosed within the six months prior to the start of your coverage.
Is credit disability insurance worth it?
It depends on the type of policy you’re offered and your circumstances. If the disability policy you have through your employer is enough to cover your bills, including your loans, you may not need this coverage. Otherwise, having your loan payments covered if you suffer a covered illness or injury can keep you from being delinquent on your loans or using your savings or retirement funds to cover your bills.
The amount of the premium can vary widely, as can the maximum coverage limits. Read the policy carefully and do the math to make sure you’re getting the coverage you really need. In some cases, you may be better off purchasing an individual disability insurance policy that offers more flexibility.
Pros and cons of credit disability insurance
Pros
- Supplements your disability coverage. Having credit disability pays for your loans so you can spend your disability insurance payments on other household needs.
- Avoid missing payments. Steer clear of late fees, the hit to your credit score and the loss of your house or car.
Cons
- Coverage is limited. If you owe more than your maximum coverage limits, you could run out of coverage before you’re able to go back to work.
- Bundled coverage. Some credit disability insurance is only available in a package of credit insurance options, such as credit life insurance, involuntary unemployment coverage and property coverage. This can cause your premium to be much higher than it would be with disability insurance alone.
- Pre-existing conditions aren’t covered. If your disability is caused by a condition you were diagnosed with within six months prior to the start of your coverage, the policy won’t pay your benefit.
Alternatives to credit disability insurance
Consider different types of credit and disability insurance, each offering coverage in a different situation.
- Disability insurance. If you don’t have a disability plan, this option offers short- and long-term options with more flexibility.
- Credit life insurance. This coverage pays off your loan if you die while still owing on the loan, up to your policy limit.
- Credit involuntary unemployment insurance. If you’re laid off or unable to work due to an employee strike, this coverage covers your payment until you can go back to work.
- Credit property insurance. Covers the repair or replacement of the item you’re purchasing with your loan.
- Credit leave of absence insurance. Make your payments while you’re on family or medical leave from work, such as maternity leave.
Bottom line
Credit disability insurance can be a low–cost way to ensure your loan payment is covered if a disabling illness or injury keeps you from work. But policies vary in both cost and benefits. If the lender you’re using is offering an inadequate or overly expensive policy, you may be better off opting into a disability insurance policy that offers more flexibility.
Common questions about credit disability insurance
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