Is Loan Protection Insurance Worth It?
Loan Protection Insurance - What You Need To Know
Is loan protection insurance worthwhile, or is it just another cost that you don't really need? Here we will have a look at when to consider loan protection insurance, whether it really offers value for money, and what your other options might be if your income stops.
How much does loan protection insurance cost?
Loan protection insurance will usually cost a percentage, usually 10 to 15 percent, of the total amount that you finance.
For a lower premium that still offers the protection you need, you might consider Loan Termination Insurance, which is explained below and comes at a fixed price for a fixed benefit amount.
What does loan protection insurance give you?
If you cannot meet your loan repayments, loan protection insurance will kick in to meet your repayments after the excess period, usually 21 days.
If you make a claim against your loan protection insurance, the benefit will be paid directly to the lender you've borrowed the loan amount from. The insurance company will pay either the remainder of your loan balance or the maximum benefit payments of $2,500.
This means you'll be able to keep your car.
Pros and cons of loan protection insurance
Credit protection insurance, like anything else you can purchase at a car dealership, can end up being a rip-off if you haven't done your research and read your credit protection contract.
There are some real benefits to this kind of insurance if you make sure the policy you get covers you for your needs.
Benefits of loan protection insurance
Loan protection insurance was designed to allow policyholders to repay their loans when unexpected circumstances occur, such as being unemployed or unable to work for a period of time.
1. Peace of mind
If you are out of work due to illness, or other circumstances beyond your control, your loan repayments will be met.
2. Keep your vehicle.
If your loan protection is for a secured car loan, you'll be able to keep your car. Or you'll be able to keep your loan money if you've taken out an unsecured personal loan.
3. Choose your level of cover and premiums
When you select loan protection insurance, you can choose your level of cover. This means that you can choose to pay a lower premium in return for receipt of a partial benefit to cover your loan payments.
You can also choose to have your loan protection insurance cover your loan repayments for a specified period of time rather than for the full sum of the loan balance.
4. Protect your credit score
Loan protection insurance protects you from credit defaults when you are out of work and unable to meet your loan repayments.
What to watch out for
If you decide that loan protection insurance is suitable for your situation, here's how you can avoid getting a rip-off deal.
1. You'll need to meet eligibility criteria
If you are unemployed, working part-time, in casual work, or self-employed there may be exclusions that apply. Make sure that you understand how and what your cover includes if you fit into any of these situations.
To be eligible for loan protection insurance, you will need to be between 18-64 years, have continuous gainful employment of at least 20 hours per week, or casual employment where you've been with the employer for at least 12 months.
You won't be covered if you are employed in a seasonal or intermittent role, or you are contracted for a position for less than the term of your loan contract.
2. Do your premiums provide value for money?
When you're considering an income protection insurance policy, you'll need to consider whether the premium you pay provides good value for money. To do this, compare the monthly premium to your benefit in the event of a claim.
Then compare this to your other options available for ensuring that you can repay your loan to decide if you are getting good value
3. Do you already have appropriate insurance in place?
When you have income protection in place, this may be adequate to cover your loan repayments, depending on the level of cover that you have.
4. Are you covered for a pre-existing condition?
If you have any pre-existing health issues that could recur, you might not be covered if this condition is the reason you are unable to work for a period of time.
Who should get loan protection insurance
If you meet the eligibility criteria and don't have another feasible way to repay the loan in an unexpected turn of events, then you should consider loan protection insurance.
Alternatives to income protection insurance
Loan protection insurance is designed to help you meet loan repayments if your income stops. There are some other ways you can do this:
Saving an emergency fund to cover your loan amount
If you have an emergency fund in place, you will be able to use your savings to make your loan repayments until you return to work.
Income Protection Insurance
Income protection insurance often comes with your superannuation policy. You can also take out an income protection policy outside your super. Check what cover you have in place before taking out additional insurances.
Loan Termination Insurance
Loan termination insurance is insurance that covers any shortfall if you decide to return your car to the lender if you can't meet loan repayments.
It covers you up to the age of 65, for accidental death, disability, trauma, involuntary unemployment, international job transfer or self-employed bankruptcy. You can choose the amount you are covered for, from $10,000 up to $30,000, with a maximum policy term of seven years.
You'll be covered for the difference between the market value and the amount that you owe to the lender.
Whether you choose to take out loan protection insurance or not, it's important that when you take out a credit contract for a personal or car loan, that you have a plan to pay out your loan in any future event.