Is credit disability insurance right for me?

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 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 work full-time.
• Pre-existing conditions. You probably won’t be covered for an illness 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 premium amount 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.

8 questions to ask before getting credit insurance

The Federal Trade Commission and other consumer watchdog groups warn that credit insurance isn’t always necessary. Ask yourself the following questions to learn whether you or your situation could benefit from credit insurance:

1. Do I already have life or disability insurance? If you do, chances are good that your insurance policy covers loan repayments after an injury or death.
2. How does the cost compare to traditional insurance? If you don’t yet have life or disability insurance, getting policy quotes from insurance providers first can shed light on whether your lender’s offer is a competitive deal.
3. Can I afford it? Credit insurance increases the cost of your loan, sometimes significantly. Make sure that your budget can absorb it.
4. How does the premium work? Is the premium added to your entire loan amount — which means you’ll pay interest on it — or is it something you pay separately each month?
5. What does it cover? Carefully read the fine print to make sure you understand what’s covered under specific circumstances.
6. Can I cancel my policy? Ask whether you can cancel coverage within your loan’s terms — and, if so, whether you’d qualify for a refund.
7. When does coverage go into effect? Some credit insurance policies require a waiting periods, meaning your insurer might not pay out your benefit immediately.
8. Is my cosigner covered? If someone else is also signing your loan, ask if they’re covered and to what extent.

Pros and cons of credit disability insurance

3 things to know before signing up for credit insurance

Credit insurance isn’t always a helpful addition to your loan — especially if it makes your loan more expensive than you can afford. When considering this protection, know that:

• It’s never required. It’s illegal for lenders to require you to buy credit insurance — though some strongly recommend it. If a lender says you must purchase credit insurance to get a loan, look elsewhere.
• It’s not included in the APR. Sometimes lenders push credit insurance on low-credit borrowers to increase the cost of the loan without having to increase the APR.
• It can increase your loan amount. Some lenders add your credit insurance premium to your loan balance, meaning you’ll pay more in interest over time. This can lead to higher monthly repayments, which you might not be able to afford.

Read the fine print

An untrustworthy lender might try to sneak credit insurance into the terms and conditions of your loan. It’s another reason to carefully read your loan contract before you sign it.

If you notice terms that sound like they’re referring to something like credit insurance, ask your lender. The FTC recommends that you find another provider if yours tries to pressure you into buying credit insurance.

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 for a disability insurance policy that offers more flexibility.

Common questions about credit disability insurance

Can I cancel my credit disability insurance policy?

You can cancel your coverage at any time, and if you cancel within the first 30 days, you can usually get your full premium back.