What is Loan Protection Insurance?

Article Details
  • Written By: wiseGEEK Writer
  • Edited By: O. Wallace
  • Last Modified Date: 27 October 2018
  • Copyright Protected:
    Conjecture Corporation
  • Print this Article

Loan protection insurance usually does not refer to loans taken out for home mortgages. Instead it is an insurance policy that might begin when a person takes a personal loan, buys a car with a loan, or begins a credit card account. When these insurance policies work as expected, they provide some protection toward making loan payments (usually for no more than a year) should certain circumstances occur, like loss of job or prolonged illness. In the case of death, loan protection insurance may, depending on terms, pay the loan in full.

There are lots of countries that have this type of insurance, and in most cases, people can decline having it if they chose. Sometimes on bad credit loans, people might be required to take out some form of loan protection insurance and they’re liable to have to pay quite a bit more for it, since bad credit makes the insurance industry see these folks as less likely to repay financial obligations.

Many insurers have either standard or age related policies. Age related policies cost more as people advance in age, but less for younger people. Age related loan protection insurance might be a cheaper option for younger people, but older people may want to choose standard options instead.


The degree to which loan protection insurance is valuable depends on its coverage and exclusions. Exclusions need to be evaluated carefully. Plans might have exclusions on massive illness resulting from pre-existing conditions, on unemployment or financially grave circumstances for those who were previously self-employed, and many more. Though usually difficult to do, people should fully read the terms and conditions of any policy they are considering purchasing.

While loan protection insurance can be valuable, they do add extra cost to a loan. This amount varies and could be factored in several different ways. It’s usually a percentage of the loan, but the specific percent can be based on issues like age, credit report and company offering the insurance.

There’s also a little trick that some lenders employ to get people to purchase loan protection insurance. This is when a lender offers a lower interest rate in exchange for people buying this protection. For many borrowers the cost of purchasing the insurance may end up making no different between higher loan interest amounts and lower ones. It’s worthwhile noting this because it may not always be a good deal.

In the end, people have to decide if they require this insurance. Some people are thrilled with the extra protection, especially in a shaky economy. Others are more interested in saving the money that loan protection insurance would cost.



Discuss this Article

Post your comments

Post Anonymously


forgot password?