When you take out any kind of loan or credit agreement, you are almost certain to be offered loan insurance. This is a policy that is supposed to protect you in case anything happens to prevent you making repayments on your loan. You can have one whether it’s a mortgage, a bank loan, a credit arrangement for buying a car, a store card, or any other kind of credit.
Loan insurance is very popular and thousands of policies are sold every year. So why do so many people buy them?
The person selling you one of these policies will almost certainly mention “peace of mind”, and this is certainly an important reason for buying a policy. Obviously if you’re taking on a major financial commitment, the thought of being unable to meet the payments would be a nightmare. It could mean the bailiffs seizing your belongings, a seriously impaired credit rating, or at the very worst losing your home. So the idea is that, with loan payment insurance, this is no longer something you have to worry about.
In addition, of course, most of us like to feel we are being prudent and thorough. We all like to think we have taken every possible precaution against things going wrong. If you refused to take out loan payment insurance, you might well feel guilty about failing to protect yourself and your family.
So taking out loan payment insurance can be a good idea. If you did find yourself made redundant, or unable to work because of an accident, this would be a highly stressful situation. Knowing that your loan payments could continue would greatly reduce the stress.
However, there are also some downsides to loan payment insurance, so you need to consider these before you decide.
• A loan payment insurance policy that is linked to the loan itself will be “one size fits all”. It wouldn’t be tailored to your actual situation so it might not be suitable for you.
• A loan payment insurance policy only protects against very specific circumstances. If you buy a policy thinking it will cover you whatever happens, you could be in for a nasty shock. For instance, it could claim to cover you against “illness”, but in the small print there could be a list of conditions that are not covered, including some quite common ones. The small print also usually contains a list of exclusions, some of which might apply to you – for instance, those in casual or seasonal employment. Sadly, the people selling the policies don’t often encourage you to read the small print before buying.
• A policy added to the loan can add significantly to the cost of the loan. You could potentially find yourself paying out considerably more each month, without receiving any real benefit.
A loan payment insurance policy may well be very worthwhile for you. But if you are thinking of taking one out, don’t take anything for granted. Read the small print carefully and find out if the policy is suitable for you. You will find that a loan insurance policy that is independent of the loan itself is much more flexible. If not, talk to a broker and find one that is.