Loan protection insurance
If you find yourself unable to work, a loan protection insurance policy will pay out monthly benefits straight to your bank account.
Loan protection insurance covers debt repayments if you are unable to work and can’t make them. Here’s how to compare and find the best policy for you.
What is loan protection insurance?
If you’re unable to work because you are ill or you have had an accident, or you lose your job, loan protection insurance can provide a regular sum of money to cover the loss of income so you can continue to make payments towards debts. This can be for something such as paying back a credit card, personal loan or car finance deal.
It’s very similar to payment protection insurance, or PPI, and is a form of income protection, but this type of insurance will provide cover for multiple debts, whereas PPI provides cover for just one debt.
It won’t cover your entire salary – payments are usually for up to 60% of your income.
What does it cover?
Loan protection insurance covers you if you’re unable to work because of an accident or illness or if you lose your job. It’s a short-term product and you’ll choose the length of time you want it to last when you take it out.
You can usually take out short- or long-term loan protection insurance, depending upon how long you want to receive an income to meet your debt repayments. Short-term policies pay out for a maximum of 12 months while long-term policies can last up until you retire.
It can provide up to 60% of your income, but it is usually designed to cover your debt repayments.
What doesn’t it cover?
There are a number of exclusions with loan protection insurance. These depend on the insurer, but the following apply to most policies:
- You won’t be paid immediately. There is usually a period between when you stop working and when you receive the payment.
- You usually need to have been working for the same employer for a set period, usually 24 months.
- Time off work for cosmetic surgery isn’t usually included, or for treatment which isn’t medically necessary – each insurer will have a list of conditions and scenarios it accepts.
- If you’re not able to work because you’re in prison, or if you’re not able to work because of an incident related to drugs or alcohol abuse, you may not be able to claim.
Do I need loan protection insurance?
If you were to lose your job or be unable to work because you are ill or have had an accident, would you still be able to make repayments on any loans you are repaying? If you’d have enough money to do this, then buying loan protection insurance isn’t worth it.
However, if you wouldn’t be able to make these payments and you don’t have access to other savings or state benefits, it could be a good idea.
How much does loan protection insurance cost?
The cost of loan protection insurance, as with any kind of income protection insurance, is based on lots of different factors. These include the following:
- Your age
- Your profession
- Your medical history
- Lifestyle choices such as if you smoke or not
- Where you live
- How much you’d like to receive if you do claim
- How long you’d like to receive the money for
How old do I have to be to get loan protection insurance?
You usually can’t take out loan protection insurance until you are 18, but different insurers may have different age limits.
How to find the best loan protection insurance
The best loan protection insurance policy for you will depend upon your circumstances, such as how much your existing loans are. Here are some steps to help:
- Do you really need loan protection insurance? Before you look at policies, it’s worth considering if you need this type of insurance or not. If you have enough money put aside to cover debt repayments if you did lose your income, then you don’t need it. This could be from existing savings, money from friends or family members, or money from state benefits such as Universal Credit. However, if you would struggle to make debt repayments, it could be a good idea.
- Are you already covered? If you did lose your job or were too ill to work, do you already have protection in place? Could you take a mortgage holiday, for example, or a break in repayments? It’s worth exploring all of these options before buying a new policy.
- Not all policies are the same. Finding the best policy for you is about reading the small print, comparing different insurers, and making sure you’re happy with the policy, how it works, and how it could help you before you sign on the dotted line.
How to claim on my loan insurance protection policy
Most loan insurance protection policies will require some paperwork before you can claim. You will need to contact your insurer to tell it if you have lost your job or if you’re too ill to work. It will tell you what it needs to see, but this may include medical documents or paperwork to show your loss of income.
The bottom line
There are lots of different types of income protection insurance and it can be confusing deciding which, if any, you need.
The best policy for you will depend upon your financial situation but it’s important to check the small print with a fine-tooth comb. The last thing you want is to buy a policy which you can’t actually use if you need to.
Frequently asked questions about loan protection insurance
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