Before I begin, I would like to say that though I have discussed about credit insurance in detail, this type of insurance is not usually offered in India. It is a new form and not much talked about.
WHAT IS IT?
Credit insurance protects both the insurer and the lender in the event of death, disability, unemployment. It pays the amount of debt due directly to the lender in the event of occurance of the stated circumstances. It is mainly sold in connection with specific loan. Cost of insurance (if any) is generally built into the loan amount.
WHAT ARE THE TYPES OF CREDIT INSURANCE?
Credit life insurance : It pays off the debt in the event of death.
Credit disability insurance : pays off monthly installment directly to the lender when the insured person is disabled. Insurance company may impose condition on number of days for which disability should continue then only the debt installment shall be paid to the lender.
Credit unemployment insurance : Pays monthly installment directly to the lender in case of involuntary unemployment like layoff. Condition for minimum period of unemployment shall be imposed after expiry of such period only the benefit shall be paid.
THINGS TO BE CONSIDERED
Some of the common questions every person should ask themselves before taking the insurance are:
Do I have any other insurance or other assets? If yes, will my existing resources be sufficient to meet my debt obligation in the event of death, disability or unemployment?
How much is the premium? Will it be better to opt for traditional life insurance or disability insurance?
Will the insurance cover the full term of loan and the entire balance?
What conditions are not covered by the policy?
Can I cancel the insurance
Can the insurance company or the lender cancel the insurance?
Will the terms of policy be changed without my knowledge? If no, in the event of change will I be notified in sufficient advance period?
FOR WHAT TYPE OF LOANS CREDIT INSURANCE IS AVAILABLE?
Credit insurance is available on all types of personal loans. Examples of loan on which credit insurance is available include purchase of appliances, vehicles, farm equipments, as well as educational, credit card, mortgage loans.
HOW IS IT PAID FOR?
There are two primary ways to pay for credit insurance:
Single Premium: The premium is generally added to the loan amount and included in the amount financed. This increases the amount borrowed as well as the amount of interest you will pay.
Monthly Premium: Monthly premium is calculated by multiplying the outstanding balance in your account on the account’s monthly billing date by the premium rate or by multiplying the average of the daily loan balances during the previous month by the premium rate.
WHAT IS THE COVERAGE OF THE INSURANCE?
Some credit insurance policies may not cover the full term and amount of loan. It depends upon the policy taken.
Certain other factors which may affect the decision to take credit insurance are:
Eligibility : Let us understand this with an example:
Suppose Mr. X is 25 year old and Mr. Y is 66 year old. In this case it would be easier for Mr. X to get credit insurance because of his age.
Let us take another example:
Suppose Mr. X though young had suffered from serious medical condition in the past. In this scenerio it would be difficult for him to get credit disablility insurance.