Loan Insurance – Is It Worthwhile Or Not?

When you take out a loan or other type of credit, you will have to decide whether to take out loan insurance.

There are differing views about whether loan insurance is worthwhile or not. To decide whether it’s worthwhile for you, you have to answer the question: If I lost my regular income, would I be able to keep up my repayments on this loan?

There may be reasons why you would be able to manage:

• You may have a partner or spouse whose salary would be sufficient to cover the payments
• You may have savings that you could use
• You may have parents who could help you

If any of these applies, you may be better off not taking loan insurance, as it will add to the cost of the loan.

However, the majority of people probably won’t have these options open to them. If you are one of these, then loan insurance may well be a good idea. Nevertheless, to make it worthwhile, you still need to ensure you are not paying over the odds and that it’s what you actually need.

First and foremost, make sure you are actually eligible. Any loan insurance policy will only pay out if the policyholder was in permanent employment at the time of taking out the policy. So it will be of no use to you if you are retired, a full-time housewife, a student or, sometimes, self-employed – though unfortunately some providers may not tell you this.

Remember that you do not have to take your loan insurance from the provider of the loan. Some will try to convince you that you do, but it’s not true. It’s almost always better value to buy a stand-alone policy from an independent provider. In fact, if you have more than one loan, you may well be able to purchase a single policy to cover all your loans.

Do check the small print and exclusions very carefully, and try to find a policy that allows you to pay only for the circumstances that apply to you. For instance, if you have good sick-pay arrangements in your place of work, you may not need the “sickness” element. A “one size fits all” policy will be more expensive than a flexible one, and there’s no virtue in paying for what you don’t need.

Be aware of circumstances when the loan insurance policy won’t pay out. Most won’t pay out if you have to stop work for such reasons as back pain, stress, or alcohol- or drug-related conditions. Importantly, they also wouldn’t pay if you were off work with a pre-existing condition you had failed to mention when you took out the policy, so do make sure you provide all the necessary information at the start.

The decision as to whether loan insurance is worthwhile or not is one you can only take for yourself. If you would have no other means of keeping up your payments if you lost your income, and provided you made sure that you got the best value, it would be worthwhile and a good investment for you.