When you are discussing insurance for loans, there’s one thing you have to keep in mind. The person selling you the insurance has no interest in keeping your costs down. The more you pay, the better for them! In actual fact, the majority of people end up paying far more than they need to for their loan insurance.
So what can you do to make sure you don’t pay too much? Here are some suggestions.
1. First and foremost, remember that there is no need to purchase your insurance from the provider of the loan. In most cases, you are better advised to look for a free-standing PPI (payment protection insurance) – an insurance broker can advise you about buying these. You can usually use just one of these to cover all your loans and credit agreements, so you don’t have to take out a separate policy for each one. What’s more, they are much less expensive. A policy from the lender will usually be quoted at between £10 and £30 per £100 of the loan amount, whereas some PPIs are quoted at £1-£2 per £100. A big difference!
2. There are various things you can cover for in a loan insurance policy. Most people find that some of the contingencies covered in the policy are irrelevant to them, so they are actually wasting money. Look for a good policy that will allow you to insure for only the elements that apply to you. For example, if you are not employed, there is no point in paying for cover against being made redundant.
3. Be careful how you pay your premium. Don’t pay it all as a lump sum up front, or you won’t get any of it back if you pay off the loan early. And if you are buying the lender’s insurance, don’t let them roll it into the loan. This means you will pay interest on the insurance as well as the loan! Have the actual premium instalments added to your monthly statement or even better, buy a loan insurance policy from an independent provider.
Insurance for loans can be very beneficial – it can provide peace of mind, and greatly relieve the stress of unwelcome life events such as accidents, serious illness or redundancy. However, it can also add considerably to the cost of the loan if you’re not careful. Many people just pay up without realising that they are paying too much. Don’t be like them – think what you could do with the extra cash!