How does loan insurance work?
Loan insurance (or loan payment protection insurance to give it its full title) works in a very simple and straight forward way. It provides a tax free monthly amount that will be used to meet any monthly loan commitment in the event that you become unable to work because of an accident or sickness, or due to being made involuntarily unemployed. (This is why it can also be called ASU insurance – accident, sickness and unemployment insurance).
How does it differ from income payment protection insurance?
Unlike income payment protection insurance, which provides a regular monthly payment which can be used just like an earned income and completely at your own discretion, loan payment protection insurance is debt specific. The benefits payable are earmarked or “ring-fenced” for the specific purpose of meeting your monthly loan repayment.
How much of my income can I cover in this way?
Typically, this type of insurance can be used to cover up to 50% of your normally earned income, or £1,500 a month, whichever is less. Policies differ, however, and these limits may vary from insurer to insurer. As with all insurance policies, it is important to read it carefully and thoroughly understand the specific terms and conditions before purchase, in order to ensure that the loan cover meets your particular needs.
When will the policy pay out?
The loan insurance pays out in the event of any of the defined risks. Depending on the particular policy chosen, this can be due to you becoming incapacitated and unable to work because of an accident or sickness, or because you have been made compulsorily redundant. There is a minimum “qualifying” period for which you must be off work or out of work before the insured benefits become payable. This can be as short a time as 30 days or, with some policies, can be as long as 90 days.
At the end of the qualifying period, if you are still incapacitated or unemployed, some policies will then backdate the payable benefits to the first day you became off work or out of work. Other policies, however, treat the qualifying period as an effective policy excess and any loss of income during this period must be met by you. Once again, therefore, it is important to understand the particular terms and conditions of the loan insurance policy before purchase.
How long will the loan insurance pay out for?
The principle underlying loan protection insurance is that it should provide a relatively temporary safeguard for meeting your loan repayments for as long as you are incapacitated by an accident or sickness, or experiencing short-term unemployment. The insured benefits will be paid out each month, therefore, until you are well enough to return to work, have secured alternative employment, or – generally – for up to a maximum of 12 months, whichever comes sooner. Some policies, however, offer the option of increasing this maximum period to 24 months, but obviously at a greater cost.
Can incapacity and unemployment be covered separately?
Although most loan insurance policies package together the risks of accident, sickness and unemployment, some insurers offer policies against incapacity (accident or sickness) and unemployment separately. By reducing the risks of claiming on a more restricted level of cover, the cost of the monthly premiums can be even more affordable than the complete package.